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                                                     Ibis Technology Corporation


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
    For the fiscal year ended December 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
    For the transition period      to
                              
                         Commission file number: 0-23668

                           IBIS TECHNOLOGY CORPORATION
             (Exact name of registrant as specified in its charter)

            MASSACHUSETTS                     04-2987600
     (State or other jurisdiction          (I.R.S. Employer Identification No.)
   of incorporation or organization)

    32 CHERRY HILL DRIVE, DANVERS, MA          01923
(Address of principal executive offices)     (Zip Code)

       Registrant's telephone number, including area code: (508) 777-4247

Securities registered pursuant to Section 12(b) of the Exchange Act:

       None.

Securities registered pursuant to Section 12(g) of the Exchange Act:
       Title of each class

       Common Stock, $.008 Par Value Per Share
       Redeemable Common Stock Purchase Warrants

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) on March 11, 1997, was
$31,289,918, based on the last sale price as reported by the Nasdaq National
Market System.

         As of March 11, 1997, the registrant had 5,197,278 shares of common
stock outstanding.

         DOCUMENTS INCORPORATED BY REFERENCE

         The following documents (or parts thereof) are incorporated by
reference into the following parts of this Form 10-K: Certain information
required in Part III of this Annual Report on Form 10-K is incorporated from the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 15, 1997.



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Ibis Technology Corporation


                                     PART I

ITEM 1.  BUSINESS

INTRODUCTION

     Ibis Technology Corporation ("Ibis" or the "Company") is an advanced
materials company and the leading supplier of SIMOX (Separation by IMplantation
of OXygen) wafers to the semiconductor industry. SIMOX wafers are
state-of-the-art silicon-on-insulator ("SOI") wafers which enable the production
of integrated circuits with significant advantages over circuits constructed on
conventional bulk silicon or epitaxial wafers. These advantages include
substantially reduced power consumption, more efficient low-voltage operation,
significantly improved speed, and reduced integrated circuit manufacturing
costs. These characteristics make SIMOX wafers well-suited for many commercial
applications, including cellular phones, wireless communications devices,
portable and desktop computers, automotive electronics, and microwave systems.
SIMOX wafers are created by implanting oxygen atoms below the surface of a
silicon wafer in sufficient quantity to transform a layer of the silicon to
silicon dioxide, while maintaining a thin layer of circuit quality single
crystal silicon at the surface.

     The Company began its operations in 1988, producing four, five and six inch
SIMOX wafers, mainly for military applications, on an NV-200 implanter
manufactured by Eaton Corporation ("Eaton"). Since 1989, the Company has spent
in excess of $10 million for the development of its proprietary oxygen implanter
(the Ibis 1000) and advanced proprietary processing technologies which enable
the production of SIMOX wafers capable of meeting the requirements of high
volume commercial applications, including the production of eight inch wafers.
The Ibis 1000 prototype, with proprietary beam scanning technology, became
operational in 1993, permitting the Company to begin producing wafers of this
size. The first fully-automated production version of the Ibis 1000 implanter
was completed in May 1995, enabling volume production of high-quality SIMOX
wafers. Since then the Company has constructed two additional implanters, one of
which was sold to one of the Company's largest customers. The Company believes
that its demonstrated ability to supply high quality, competitively priced
wafers and its increased wafer production capacity, together with substantial
progress in customers' development programs, are accelerating the acceptance of
Ibis-produced SIMOX wafers for mainstream commercial applications.

     In recent years, the Company has focused on integrating SIMOX wafers into
commercial applications, which have substantially higher volume potential than
military applications, the Company's initial target market. Unit sales of SIMOX
wafers for commercial applications have expanded from approximately 36% of the
Company's total wafers sold in 1992 to approximately 88% of its wafers sold in
1996.

     Ibis has sold SIMOX wafers to most of the world's leading commercial
semiconductor manufacturers, including Advanced Micro Devices, Digital Equipment
Corporation, Fujitsu, Honeywell, IBM, Intel, Mitsubishi Electric, Motorola,
National Semiconductor, NEC, Philips, Samsung, Sharp, Texas Instruments, and
Toshiba. These commercial shipments have been used principally for evaluation
purposes in products, including ASICs (application specific integrated
circuits), memories (DRAMs, SRAMs, etc.), and cellular and mobile radio
components. For any potential customer who is ultimately committed to designing
and building integrated circuits on SIMOX wafers, the time required for a
customer to make a definitive buying decision and for Ibis to "make the sale" -
from initial contract to full-scale chip fabrication - will be lengthy and
proceed along definable, targeted stages. The sales cycle typically goes from
intensive evaluation of Ibis' SIMOX material in the customer's process
laboratory to full circuit evaluations in the chip-design lab which, we hope,
will lead to full scale chip production in the fab. This is a normal sales cycle
in the semiconductor industry for any technologically advanced material such as
Ibis' SIMOX. In addition, the Company supplies SIMOX wafers to military-oriented
semiconductor manufacturers such as Allied-Signal Aerospace and Honeywell for
use in production applications.


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     The Company believes that strategic alliances will play an important role
in developing a worldwide commercial market for SIMOX wafers. In September 1995,
the Company and Motorola entered into an agreement for Motorola to provide
funding to the Company to substantially expand the Company's current SIMOX wafer
production capacity to meet requirements of Motorola for its commercial
programs. The implanter that was constructed with this funding became
operational in September, 1996 and shipments to Motorola under the terms of this
Agreement commenced shortly thereafter. The two companies continue to work
closely to advance the processing and testing of SIMOX material in conjunction
with Motorola's rigorous quality standards. The Company also has a strategic
alliance agreement with Mitsubishi Materials, under which Mitsubishi markets and
sells in Japan SIMOX wafers manufactured by Ibis. The Company and Mitsubishi are
collaborating on joint research and development focused on commercial deployment
of SIMOX technology with the ultimate objective of establishing SIMOX
manufacturing capability in Japan to service this marketplace.

     In May 1996, the Company entered into an agreement with one of the world's
leading semiconductor manufacturers for the sale of an Ibis 1000 implanter,
which was delivered to the purchaser in November 1996. Under the terms of this
agreement, there are certain limitations on the purchaser's ability to sell
SIMOX wafers produced on this implanter. The agreement also sets forth terms and
conditions in the event that the purchaser desires to buy additional implanters.
The revenue, together with related costs, was recognized on a percentage of
completion basis determined by the achievement of various milestones.

     The Company's objective is to make its SIMOX wafers the preferred advanced
materials substrate for mainstream commercial applications. The Company's
strategy for attaining this objective is to capitalize on the technology
embodied in the Ibis 1000 by building additional high current oxygen implanters
to increase available capacity, further advancing its process technology,
increasing throughput and reducing production costs, and to form strategic
marketing, manufacturing and distribution alliances. The Company believes that
this strategy will enable it to become the predominant supplier of SIMOX-SOI
technology and SIMOX wafers with the quality, cost, and size required for
mainstream commercial applications.

     Ibis was incorporated in Massachusetts on October 7, 1987 and commenced
operations in January 1988. Ibis' executive offices are located at 32 Cherry
Hill Drive, Danvers, Massachusetts 01923. Its telephone number is (508)
777-4247.

MARKETING, SALES AND CUSTOMERS

     While the silicon wafer market is projected in the Rose Silicon Report to
grow at an approximate 16% compounded annual growth rate through 1999, the SIMOX
market is projected to expand at a 43% compounded annual growth rate during the
same period. The Company believes that these growth rates are consistent with
its capacity expansion and product development roadmap.

     The Company intends to take advantage of this projected growth by
continuing to conduct a direct selling effort focused on the top 20 U.S.
semiconductor manufacturers, most of which are customers of the Company. Ibis'
sales personnel together with Ibis' senior management and engineering and
scientific personnel interact with the research and development, manufacturing,
purchasing and marketing departments of customers in assisting in the
evaluation, prototyping and production of circuits fabricated on its SIMOX
wafers.

     An important element of Ibis' selling strategy is its substantial
commitment to technical support for its customer base. Ibis offers detailed
technical assistance in the areas of device physics, material science, circuit
design, and semiconductor manufacturing, to facilitate customers' integration of
SIMOX technology into their product lines. Another important element of the
Company's sales and marketing strategy is to develop and maintain a reputation
for technical excellence. To this end, the Company frequently presents papers at
technical conferences and collaborates closely with the research and development
labs of selected customers,


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Ibis Technology Corporation


industry consortium and government laboratories on advanced research projects.
The Company believes that its ability to make this technical expertise available
to customers will accelerate the incorporation of SIMOX technology into
mainstream commercial applications.

     Overseas, the Company relies on its direct sales force, together with the
use of manufacturer's representatives, to market its products. The Company has a
strategic alliance with Mitsubishi Materials, under which Mitsubishi markets and
sells in Japan SIMOX wafers manufactured by Ibis. The two companies are also
collaborating on joint research and development focused on optimizing SIMOX
process technology for high-volume commercial applications with the ultimate
objective of establishing SIMOX manufacturing capability in Japan to service
this marketplace. See "Business -- Strategic Alliances." The Company has also
targeted Korea, where it has a marketing arrangement, and Europe, where it sells
directly, as areas of focus for its products.

     During the fiscal years ended 1994, 1995 and 1996 revenues from Honeywell,
IBM, Motorola, and Texas Instruments accounted for, in the aggregate,
approximately $1,266,000, $2,554,000, and $6,420,000 or approximately 39%, 55%,
and 68% of the Company's revenues, respectively.

     Customers of the Company that purchase wafers for military applications are
reliant in part on government funding, primarily from the Department of Defense.
During the fiscal years 1994, 1995, and 1996, approximately 32%, 18%, and 10%
respectively, of the Company's product sales were generated by product sales to
such customers.

     Sales to overseas customers in 1994, 1995 and 1996 were less than 10% of
total revenue in those periods.

STRATEGIC ALLIANCES

     The Company has entered into a number of strategic relationships which the
Company believes enables it to better address its target market, to advance its
technology more effectively, and to match its technical developments and
production expansion to the needs of its key customers.

     In September 1995, the Company and Motorola entered into a strategic
business development agreement whereby Motorola advanced to Ibis the required
funding to build an Ibis 1000 implanter. The SIMOX wafer manufacturing capacity
of this implanter will be primarily dedicated to serving Motorola's production
requirements until at least December 31, 2000, with cash price concessions to
Motorola reflecting the amortization of the funding. Ibis has agreed to grant to
Motorola a security interest in the implanter to secure Ibis' obligations to
Motorola. The implanter which was fully funded by Motorola became operational in
September 1996, and Ibis is currently shipping wafers to Motorola under the
terms of this Agreement. In connection with this agreement, the two companies
continue to work closely to advance Ibis' processing and testing technology in
conjunction with Motorola's rigorous quality standards.

     In July 1994, the Company entered into a business development agreement
with Mitsubishi Materials, under which Mitsubishi markets and sells in Japan
SIMOX wafers manufactured by Ibis. The two companies are also collaborating on
joint research and development focused on optimizing SIMOX process technology
for high-volume commercial applications with the ultimate objective of
establishing SIMOX manufacturing capability in Japan to service the marketplace.
The agreement contemplates that, depending upon the success of their marketing
and research and development arrangements, the parties will enter into future
business relationships for the manufacture and sale of SIMOX wafers. The initial
term of this agreement expires in 1997. It can be terminated by either company
after the initial term with 120 days written notice.


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                                                     Ibis Technology Corporation

     Since 1994, Ibis has participated in the Low Power Electronics Program,
sponsored by the Advanced Research Project Agency (ARPA), by performing research
and development and providing SIMOX wafers for evaluation by other participants
in the program. See "Business -- Research and Development." The program's
mission is to accelerate the development of all aspects of the next generation
of low power electronics. Ibis is also a participant in a program sponsored by
Sematech, a consortium of ten of the largest semiconductor manufacturers in the
United States, to facilitate high-volume production of SIMOX wafers. These two
complementary programs provide Ibis with funding, technology transfer, and
visibility and interaction with semiconductor manufacturers.

RESEARCH AND DEVELOPMENT

     The Company has active research and development programs in both equipment
and process technology. Ibis' equipment engineers continually seek to refine and
enhance the capabilities of the Ibis 1000. Current development projects are
aimed at increasing the throughput capacity of the machine, thereby lowering the
per wafer production cost, improving beam line optics and increasing beam
current and the level of systems automation. The Company's process engineers are
refining techniques to produce SIMOX wafers of higher quality, developing new
processes to produce SIMOX wafers with thinner buried oxide layers at lower cost
and at the same time responding to specific customer requirements -- all steps
aimed at enhancing the range of potential commercial applications for Ibis'
SIMOX wafers. As a result of these research and development efforts, the Company
announced in October 1996 a new SIMOX product, ADVANTOX(TM), which is currently
being tested by various customers. This product has a thinner buried oxide layer
and consequently the ability to significantly increase the output of the Ibis
1000 implanter compared to the standard SIMOX wafer product. During the fiscal
years ended 1994, 1995 and 1996, the Company's internally funded research and
development expenses were approximately $1,237,000, $1,582,000, and $1,477,000,
or 38%, 34% and 16% of the Company's revenues, respectively.

     Government sponsored research and development activities also comprise a
part of the Company's research and development effort. SIMOX technology is
important to various government agencies in large part due to its utility in
constructing high performance, radiation-tolerant defense and space-based
systems. As a result of this government sponsored research and development,
radiation-tolerant integrated circuits on Ibis-produced SIMOX wafers are now in
production for military applications at Honeywell and Allied-Signal Aerospace.
During the fiscal years ended 1994, 1995 and 1996, revenues from government
sponsored research and development contracts were approximately $737,000,
$764,000, and $396,000 or 23%, 16%, and 4% of the Company's revenues,
respectively. Research and development expenses attributable to research
contracts are expensed as incurred and included in the cost of contract revenue.

     The major focus of government-sponsored research and development has been
on improving SIMOX manufacturing methods and processes to ensure that high
quality SIMOX wafers are available for commercial and military applications. The
SBIR program, which is the largest source of direct government support to the
Company, has funded development of advanced methods of SIMOX processing,
resulting in improved fabrication and characterization of SIMOX materials. The
Company has received SBIR contracts from ARPA, the Defense Special Weapons
Agency, the U.S. Air Force, the Department of Energy, National Science
Foundation, National Aeronautical and Space Administration and the Strategic
Defense Initiative Organization. Similarly, the Company expects its cooperative
research efforts with entities including the Naval Research Laboratory, the
Microelectronics Research Laboratory, and the National Institute of Standards to
yield benefits to the Company's ongoing commercialization activities.

     Since 1994, Ibis has participated in the Low Power Electronics Program,
sponsored by ARPA. The program's mission is to accelerate the development of all
aspects of the next-generation of low power electronics, including materials,
technologies, and applications. The materials effort is largely focused on
development of processes which address high volume, low cost SIMOX manufacturing
requirements of the


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Ibis Technology Corporation


mainstream commercial integrated circuits industry. Extensive experimental work
is focused on the optimization of thinner buried oxide processes to address
these requirements. This development work is consistent with the Company's
internal research and development efforts. In addition, the ARPA program is
serving to promote the deployment of SIMOX SOI technology in commercial low
power electronics applications. In July 1995, Ibis agreed to develop SIMOX
wafers for the ARPA program as a subcontractor to a major semiconductor
manufacturer. In 1995 and 1996, the Company sold approximately $590,000 and
$568,000, respectively, of SIMOX wafers under this program. The program is
scheduled to be completed in 1997.

     Contracts with government agencies require compliance with applicable
government regulations and are generally subject to competitive bidding,
extensive regulation and cancellation at the government's sole discretion.
Pursuant to the terms of such government contracts, the Company will be required
to grant to the U.S. government a royalty-free nonexclusive worldwide license to
inventions claimed by the Company which were funded by the U.S. government.
Government contracts are subject to termination at the election of the relevant
agency. Additionally, these agreements are subject to negotiated overhead rates
and work performed under government contracts is subject to audit and
retroactive adjustments of amounts paid to the Company. In 1996, the Defense
Contract Audit Agency ("DCAA") concluded its audit of the Company in connection
with the Company's 1990 through 1995 overhead and general and administrative
rates. The amount of the retroactive adjustments of amounts previously paid to
the Company was not material.

COMPETITION

     Ibis faces three general sources of competition: direct SIMOX competition,
competing SOI technologies, and competing non-SOI technologies.

     Among direct SIMOX competitors, Ibis is presently the only U.S.
manufacturer of SIMOX wafers. The first generation oxygen implanter, the NV-200,
was produced in limited quantities by Eaton Corporation and just six are in
operation worldwide. The Company believes that Eaton has no plans to manufacture
additional NV-200's. Of these six implanters, Ibis owns two. The Company
believes that the remaining four are owned by Nippon Telephone and Telegraph
("NTT"), the Fraunhofer Institute, Nippon Steel, and SOITEC, and only Nippon
Steel and SOITEC use these machines for commercial production, as opposed to
research. To date, SOITEC, a French-based company that spun off from LETI, a
French government research lab, has been the primary source of competition for
Ibis. In 1995, Hitachi began marketing its oxygen implanter and, the Company
believes, has sold two to date, to Komatsu and Nippon Steel. Both Komatsu, in
partnership with NTT and Nippon Steel, are marketing SIMOX material. However,
the Company believes that, to date, commercial shipments made by Komatsu/NTT and
Nippon Steel have been produced by both their NV-200s and by their new Hitachi
implanters. The Company also believes that, at this stage of the market's
development, the availability of alternate sources of SIMOX wafers will help
address customer concerns about the lack of available alternate sources of
supply.

     The second source of competition for Ibis is the development of alternative
SOI materials. Two distinct approaches for this method of production are
silicon-on-sapphire ("SOS") and thin-film bonded wafers. In SOS technology,
circuitry is constructed in a layer of silicon which has been deposited on a
sapphire substrate. This material has been used in the construction of radiation
resistant circuits. However, several problems with this material, including
large current conduction in the sapphire when exposed to radiation, brittleness
causing breakage during integrated circuit fabrication and large mismatches
between sapphire and silicon crystal structures, have led to performance and
manufacturability limitations.

     Thin-film bonded wafers are constructed by bonding two wafers and then
thinning one of the two layers. In this approach, two bulk silicon wafers, each
with a thermally-grown oxide layer, are first bonded 


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                                                     Ibis Technology Corporation


together to form a silicon/silicon dioxide/silicon wafer. Several alternatives
are currently being explored across the industry to perform the subsequent
thinning process -- including mechanical polishing, chemical etching (e.g. the
BESOI process), plasma assisted chemical etching (e.g., the PACE process used by
IPEC to create AcuThin(TM) wafers), bond and selective etching of porous silicon
(e.g., Canon Eltran(R) process) or an implant-enhanced slicing of the wafer
(e.g., the (R)Smartcut process of SOITEC, used to produce (R)Unibond wafers). If
this approach becomes commercially successful, this process could reduce the
competitive cost disadvantage of the bonded wafer method. While the bonded wafer
approach has the advantages that the buried oxide can be made very thick and
that the top silicon layer is generally of very high quality, the Company
believes it suffers from two limitations. To date, achieving uniformity in the
top silicon layer comparable to that of SIMOX has proven difficult. Also, the
requirement to use two silicon wafers and perform complex processing has, to
date, resulted in a relatively high cost structure for bonded wafers. As wafer
diameters increase, the Company believes that dealing with these limitations may
become increasingly difficult.

     The third source of competition is derived from alternative non-SOI
technologies designed to obtain benefits similar to those of SOI, including
improvements to existing technologies. Significant resources are continually
expended to address the shortcomings of epitaxial and bulk silicon wafers. The
semiconductor industry has demonstrated its resourcefulness in overcoming device
physics problems with these materials through creative circuit design and
manufacturing techniques, thereby extending the useful life of conventional
substrates, and there can be no assurance that it will not continue to do so.
The relatively lower cost of these substrates provides an incentive to the
semiconductor industry to solve these problems without moving to new, more
advanced substrates. In addition, complex variations of more conventional
approaches, such as elaborate circuit structures built on bulk silicon
substrates, and compound materials (silicon-germanium, gallium-arsenide, indium
phosphide, etc.), are still in various research and development phases.

BACKLOG

     The Company's backlog consists of written orders for SIMOX wafers to be
delivered during 1997 and research and development (R&D) contracts to be
performed during 1997 and 1998. As of February 28, 1997, the backlog was
$910,245 in wafer orders and approximately $800,000 in R&D contracts. This is
compared with a backlog of approximately $1.6 million in wafer orders and
$15,000 in contracts at February 29, 1996. Approximately 61% of the backlog is
for four-inch wafers, 37% is for five and six-inch wafers, and 2% is for
eight-inch wafers. As customers of the Company move from development and pilot
production into volume production, the Company expects much of the increased
demand will be for eight-inch wafers. Approximately 94% of the present product
backlog is comprised of orders for commercial applications and approximately 78%
is comprised of orders from five customers of the Company. All customer orders
are subject to modification or cancellation by the customers.

     Backlog can fluctuate greatly based upon, among other matters, the timing
of receipt of orders. Therefore, variations in backlog may not represent a fair
indication of future business trends.

PATENTS AND PROPRIETARY RIGHTS

     The Company has an exclusive worldwide sublicense to the proprietary beam
scanning system developed and patented by a consultant to the Company during the
development of the Ibis 1000. The sublicense agreement obligates the Company to
pay a royalty of 1% of all revenue derived from the sale and servicing of
products incorporating or produced with the sublicensed technology, including
oxygen implantation machines and oxygen-implanted wafers, up to a maximum
aggregate payment of $160,000. As of February 28, 1997, the Company has paid
$102,201 of this royalty.

         The Company's beam scanning system sublicense agreement also grants the
Company certain rights to further sublicense the beam scanning system for
certain applications other than oxygen implantation. Pursuant


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Ibis Technology Corporation


to these rights, the Company has entered into four non-exclusive sublicense
agreements that permit the respective sublicensees to manufacture, use and sell
implantation machines incorporating the beam scanning system so long as such
machines are not designed for the production of oxygen implanted wafers. Each
sublicensee has paid to the Company a non-refundable option fee upon signing an
agreement and an initial license fee when it exercised its option to use the
licensed technology. In addition, each sublicensee will pay a royalty fee with
respect to each implantation machine manufactured, used or sold after its option
fee and initial license fee has been applied. License fees received by the
Company from sublicenses are to be shared on a substantially equal basis with
the Company's sublicensor of the beam scanning system. As of December 31, 1996,
the Company has received approximately $640,000 in net license fees, after
deducting amounts paid to the sublicensor.

     The Company has also obtained an exclusive license to technology developed
by Superion Limited, a United Kingdom corporation, that facilitates presentation
of wafers to ion beams. The Company has paid $90,000 for license fees at the
rate of $30,000 per implantation machine that has been manufactured by the
Company. Under the terms of this Agreement, Superion Limited has retained the
right to utilize the technology for uses not involving oxygen implantation of
silicon or other semiconductor materials.

     Although the Company owns or has exclusive rights to several patents and
several pending applications, and the Company diligently monitors the research
and development process to identify inventions which warrant pursuing patent
protection, the Company relies largely upon trade secret protection to safeguard
its proprietary technology. Each of the Company's employees is currently
required to execute confidentiality agreements pursuant to which they agree to
assign to the Company all patent rights and technical or other information
developed by the employees during their employment with the Company, and agree
not to disclose any trade secret or confidential information without the prior
written consent of the Company. Notwithstanding these confidentiality
agreements, no assurance can be given that other companies will not acquire
information which the Company considers to be proprietary. Moreover, no
assurance can be given that the Company's patent rights will be enforceable or
provide the Company with meaningful protection from competitors or that patent
applications will be allowed. Even if a competitor's products were to infringe
patents owned by the Company, it would be very costly for the Company to enforce
its rights in an enforcement action, which would also divert funds and resources
which otherwise could be used in the Company's operations. No assurance can be
given that the Company would be successful in enforcing such rights, that the
Company's products or processes do not infringe the patent or intellectual
property rights of a third party, or that if the Company is not successful in a
suit involving patents or other intellectual property rights of a third party,
that a license for such technology would be available, if at all, on
commercially reasonable terms.

     Pursuant to the terms of its government contracts, the Company will be
required to grant to the U.S. government a royalty-free non-exclusive worldwide
license to inventions claimed by the Company which were funded by the U.S.
government.

GOVERNMENT REGULATION

     The Company has entered into certain research and development contracts
with agencies of the United States government which require compliance with
applicable government regulations. These contracts are generally subject to
competitive bidding and extensive regulation and are generally subject to
cancellation at the U.S. government's sole discretion. See "Business -- Research
and Development."

     The Company is subject to a variety of federal, state and local
environmental regulations related to the storage, treatment, discharge or
disposal of chemicals used in its operations and exposure of its personnel to
occupational hazards. Although the Company believes that it has all permits
necessary to conduct its business, the failure to comply with present or future
regulations could result in fines being imposed on the Company, suspension of
production or a cessation of operations. The Company's future activities may
result in it being 


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                                                     Ibis Technology Corporation


subject to additional regulation. Such regulations could require the Company to
acquire significant equipment or to incur other substantial expenses to comply
with regulations. Any failure by the Company to control the use or to restrict
adequately the discharge of, hazardous substances or to properly control other
occupational hazards could subject it to substantial financial liabilities.

MANUFACTURING AND SUPPLIES

     The Company manufactures its Ibis 1000 oxygen implanters from standard
components and from components manufactured in-house or by other vendors
according to the Company's design specifications. Most raw materials and
components not produced by the Company are available from more than one
supplier. However, certain raw materials, components and subassemblies are
obtained from a limited group of suppliers. Although the Company seeks to reduce
its dependence on these limited source suppliers and the Company has not
experienced significant production delays due to unavailability or delay in
procurement of component parts or raw materials to date, disruption or
termination of certain of these sources could occur and such disruptions could
have a material adverse effect on the Company's business and results of
operations.

     The Company manufactures its SIMOX wafers using conventional bulk silicon
wafers and a variety of chemicals and gases, all of which are available from
multiple sources. The Company orders the wafers, chemicals and gases pursuant to
blanket purchase orders which generally may be modified or cancelled by the
Company upon 60 days' prior notice to the vendor. The Company is currently able
to purchase its required supply of bulk silicon wafers from its normal sources.
In the periods of increasing demand in the semiconductor industry for silicon
wafers, there is no assurance that the Company will be able to purchase an
adequate supply of such silicon wafers for manufacture of its products at or
near current prices, if at all. Any shortages in the availability of silicon
wafers or a significant increase in the price of silicon wafers could have a
material adverse effect on the Company's business and results of operations.

EMPLOYEES

     As of February 28, 1997, the Company employed 55 persons on a full-time
basis, and two people on a permanent part-time basis. None of the Company's
employees is represented by a labor union and the Company believes its relations
with its employees are good.

BUSINESS OUTLOOK

     This Form 10-K contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Such statements are based on management's current expectations and are
subject to a number of factors and uncertainties which could cause actual
results to differ materially from those described in the forward-looking
statements. Such factors and uncertainties include, but are not limited to, the
uncertainty that the performance advantages of SIMOX wafers will be realized
commercially or that a commercial market for SIMOX wafers will continue to
develop; the dependence by the Company on key customers (during 1994, 1995 and
1996, revenues from four customers averaged in the aggregate between 39% and 68%
of the Company's revenues, so that the loss of one or more of these major
customers and the failure of the Company to obtain other sources of revenue
could have a material adverse impact on the Company); the loss of the services
of one or more of the Company's key individuals, which could have a material
adverse impact on the Company; the development of competing or superior
technologies and products from manufacturers, many of which have substantially
greater financial, technical and other resources than the Company; the Company's
lack of experience in producing commercial quantities of its products at
acceptable costs; the Company's ability to develop and maintain strategic
alliances for the manufacturing, marketing and distribution of its products; the
cyclical nature of the semiconductor industry, which has negatively affected the
Company's sales of SIMOX wafers during industry downturns and which could
continue to do so in the future; the limited availability of critical materials
and components for 


                                                                            13

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Ibis Technology Corporation


wafer products and implanters, as a shortage of such materials and components or
a significant increase in the price thereof could have a material adverse effect
on the Company's business and results of operations; the availability of
additional capital to fund expansion on acceptable terms, if at all; and general
economic conditions.

ITEM 2.  DESCRIPTION OF PROPERTY

     Ibis' corporate office and manufacturing facilities are located at a leased
facility in Danvers, Massachusetts. The facility, which has approximately 27,000
square feet of space, includes over 2,500 square feet of cleanroom, which is
designed to accommodate a total of four Ibis 1000 implanters. In addition, the
Company has an option to lease an additional contiguous space of approximately
10,000 square feet on or before August 1, 1998. The Company's current lease
expires on December 31, 2003 and contains an option to renew for five years. The
Company believes that this space should be sufficient for planned future
manufacturing requirements.

     Ibis' current manufacturing equipment includes two NV-200 implanters, one
acquired from Eaton in 1988 and one acquired from Texas Instruments in 1993
(which is leased pursuant to an equipment lease), and two Ibis 1000 implanters
including one that is primarily dedicated to Motorola's production requirements,
as well as advanced annealing and cleaning equipment. Two additional Ibis 1000
implanters are currently under construction. One of the implanters is expected
to be placed in production in the middle of 1997 and the other implanter is
expected to be placed in production near the end of 1997. The Company is
planning to phase out production of SIMOX wafers from its NV-200 implanters
during 1997 such that in the future all SIMOX wafers will be produced on the
Ibis 1000 implantation equipment.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is not a party to any material pending legal proceedings, and
management is not aware of any contemplated proceeding by any governmental
authority against the Company of a material nature.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to stockholders during the fourth quarter of the
year ended December 31, 1996.


14


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                                                     Ibis Technology Corporation

                                     PART II

ITEM 5.  MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
             AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

     The Company's Common Stock and Redeemable Warrants began trading on May 20,
1994 on the Nasdaq SmallCap Market and on the Boston Stock Exchange. Prior to
May 20, 1994, there was no public market for the Common Stock, the Redeemable
Warrants or any other securities of the Company. On April 4, 1996, the Company
commenced trading on the Nasdaq National Market System. The Company's Common
Stock is traded under the symbol "IBIS". The Company's Redeemable Warrants are
traded under the symbol "IBISW". The following tables set forth, for 1995 and
1996, the high and low sales prices for the Common Stock and the Redeemable
Warrants, as reported by the Nasdaq Small Cap Market and the Nasdaq National
Market System.
<TABLE>
<CAPTION>

                                                                  REDEEMABLE
                                           COMMON STOCK            WARRANTS
                                           ------------            --------
                                         HIGH        LOW        HIGH       LOW
                                         ----        ---        ----       ---
       <S>                              <C>         <C>        <C>        <C>  
  1995:
       First Quarter...............     $ 3.50      $1.38      $0.63      $0.25
       Second Quarter..............     $ 4.88      $2.38      $0.75      $0.44
       Third Quarter...............     $ 6.63      $3.50      $1.13      $0.63
       Fourth Quarter..............     $11.63      $5.00      $4.13      $1.00

  1996:
       First Quarter...............     $ 9.50      $6.00      $3.50      $1.88
       Second Quarter..............     $11.25      $6.88      $5.50      $2.38
       Third Quarter...............     $ 9.13      $7.00      $4.00      $2.50
       Fourth Quarter..............     $ 9.13      $6.75      $3.88      $2.63
</TABLE>


STOCKHOLDERS

     As of March 11, 1997, there were approximately 135 stockholders of record
of the 5,197,278 outstanding shares of Common Stock and approximately 16 holders
of record of the 1,380,000 Redeemable Warrants. There are approximately 2,700
beneficial owners of the Common Stock.

DIVIDENDS

     The Company has never declared or paid any dividends and does not
anticipate paying such dividends on its Common Stock in the foreseeable future.
The Company currently intends to retain any future earnings for use in the
Company's business. The payment of any future dividends will be determined by
the Board of Directors in light of conditions then existing, including the
Company's financial condition and requirements, future prospects, restrictions
in financing agreements, business conditions and other factors deemed relevant
by the Board of Directors.

RECENT SALES OF UNREGISTERED SECURITIES

     In the fiscal year ended December 31, 1996, the Company has sold the
following securities that were not required to be registered under the
Securities Act of 1933 as amended (the "Securities Act").


                                                                            15


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Ibis Technology Corporation


     In July 1996, the Company issued an aggregate of 4,177 shares of common
stock to two individuals in connection with investor relations services rendered
to the Company. In this case, the Company issued the above securities without
registration in reliance upon the exemption provided by Section 4(2) of the
Securities Act, since no public offering was involved. No underwriters were
involved in the foregoing sale of securities.

ITEM 6.  SELECTED FINANCIAL DATA

     The selected financial data presented below under the captions "Statement
of Operations Data" and "Balance Sheet Data" for, and as of the end of each of
the years in the five-year period ended December 31, 1996, are derived from the
financial statements of the Company, which financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
audited balance sheets at December 31, 1996 and 1995 and the related statements
of operations and cash flows for each of the years in the three-year period
ended December 31, 1996 and the report thereon, are included elsewhere in this
Annual Report on Form 10-K. The data set forth below should be read in
conjunction with the Company's financial statements, related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.

<TABLE>
<CAPTION>

                                                      YEARS ENDED DECEMBER 31,
                                        ---------------------------------------------------
                                         1992      1993       1994       1995       1996
                                         ----      ----       ----       ----       ----
                                           (IN THOUSANDS, EXCEPT FOR LOSS PER SHARE DATA)
<S>                                    <C>        <C>        <C>        <C>        <C>    
STATEMENT OF OPERATIONS DATA:
Product sales ......................   $ 2,067    $ 2,747    $ 2,360    $ 3,822    $ 4,767
Contract and other revenue .........     1,031      1,331        890        811        886
Equipment revenue ..................      --         --         --         --        3,800
                                       -------    -------    -------    -------    -------
  Total revenue ....................   $ 3,098    $ 4,078    $ 3,250    $ 4,633    $ 9,453
                                       -------    -------    -------    -------    -------
Cost of product sales ..............     1,405      2,012      3,255      4,071      4,042
Cost of contract and other revenue .       416        622        399        349        320
Cost of equipment revenue ..........      --         --         --         --        2,625
                                       -------    -------    -------    -------    -------
  Total cost of revenue ............   $ 1,821    $ 2,634    $ 3,654    $ 4,420    $ 6,987
                                       -------    -------    -------    -------    -------
  Gross profit (loss)...............   $ 1,277    $ 1,444    $  (404)   $   213    $ 2,466
                                       -------    -------    -------    -------    -------
Operating expenses:
  General and administrative .......   $   868    $ 1,349    $ 1,397    $ 1,299    $ 1,423
  Marketing and selling ............       459        347        362        495        515
  Research and development .........       937        875      1,237      1,582      1,477
  Write off of prototype Ibis 1000 .      --         --         --          724
                                       -------    -------    -------    -------    -------
  Total operating expenses .........   $ 2,264    $ 2,571    $ 2,996    $ 4,100    $ 3,415
                                       -------    -------    -------    -------    -------
  Loss from operations .............   $  (987)   $(1,127)   $(3,400)   $(3,887)   $  (949)
                                       -------    -------    -------    -------    -------
Total other income (expense) .......       (63)       (31)       (73)      (105)       110
Proceeds from life insurance policy       --         --        2,000       --         --
                                       -------    -------    -------    -------    -------
Loss before income taxes ...........   $(1,050)   $(1,158)   $(1,473)   $(3,992)   $  (839)
Income tax expense .................        (1)        (1)        (1)        (1)        (1)
                                       -------    -------    -------    -------    -------
Net loss ...........................   $(1,051)   $(1,159)   $(1,474)   $(3,993)   $  (840)
Net loss per common share(1) .......   $  (.83)   $  (.70)   $  (.53)   $ (1.17)   $  (.18)
Weighted average common shares
  outstanding ......................     1,309      1,701      2,819      3,424      4,723
</TABLE>


<TABLE>
<CAPTION>

                                                    YEARS ENDED DECEMBER 31,
                                          ---------------------------------------------
                                          1992      1993      1994      1995       1996
                                          ----      ----      ----      ----       ----
                                                          (IN THOUSANDS)
<S>                                    <C>        <C>        <C>       <C>       <C>    
BALANCE SHEET DATA:
Working capital (deficit) ..........   $  (126)   $  (761)   $ 3,712   $ 3,463   $ 8,068
Total assets .......................     4,253      5,907     12,282    10,958    19,542
Long-term debt, less current portion       363        835      1,022     2,104       973
Total liabilities ..................     1,509      3,555      3,635     6,149     5,178
Redeemable preferred stock .........     6,280      6,614       --        --        --
Stockholders' equity (deficit) .....    (3,535)    (4,262)     8,647     4,809    14,364
</TABLE>

-------
[FN]
(1)Computed on the basis described for net earnings (loss) per common share in
   Note 2(g) of Notes to Financial Statements.


16


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                                                     Ibis Technology Corporation


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     The following discussion should be read in conjunction with the Financial
Statements of the Company (including Notes thereto) and Selected Financial Data
included elsewhere in this Annual Report on Form 10-K.

OVERVIEW

     The Company was formed in October 1987 and commenced operations in January
1988. The Company's initial activities consisted of producing and selling SIMOX
wafers and conducting funded and unfunded research and development activities.
This research led to the Company's development of a proprietary second
generation implanter, the Ibis 1000, and to other proprietary process
technology.

     Until 1993, much of the Company's revenue was derived from research and
development contracts and sales of SIMOX wafers for military applications. Over
the past few years, there has been a shift in revenue to sales of SIMOX wafers
for commercial applications. For the fiscal year ended December 31, 1996,
commercial product sales (measured in dollar volume) represented 90% of total
product sales compared with 24% of total product sales for the fiscal year ended
December 31, 1992. To date, most customers of the Company that have purchased
wafers for what the Company believes are commercial applications have done so
solely for the purpose of characterizing and evaluating the wafers. Thus,
historical sales are not necessarily indicative of future operations because
such sales would not be considered of a recurring nature.

     Although the Company achieved record annual revenue and operating results
in 1996, quarterly wafer sales remained relatively constant throughout the year.
In addition, approximately 40% of the total revenue in 1996 resulted from the
recognition of the revenue from the sale of an Ibis 1000 implanter to a
semiconductor manufacturer. This is the only implanter that the Company has ever
sold and the Company has not received a commitment for another sale.

     The Company currently has four oxygen implanters on-line (two Ibis 1000
implanters, one of which is primarily dedicated to serve Motorola's production
requirements and two NV-200s) and is currently constructing two additional Ibis
1000 implanters. It is anticipated that one of these implanters will be placed
in production in the middle of 1997 and the second implanter will be placed in
production near the end of 1997 or such other time as additional capacity is
needed to meet additional demand. The Company is planning to phase out the
production of SIMOX wafers from its NV-200 implanters during 1997, such that in
the future all SIMOX wafers will be produced on the Ibis 1000 implantation
equipment. As the Company expands its production capacity in anticipation of
expected increases in demand, it is anticipated that gross margins on product
sales will initially be adversely affected until the implanters operate at or
near full capacity. There can be no assurance, however, that the Company will
succeed in attracting a sufficient number of customers and/or orders for SIMOX
wafers to offset production costs or that the Company will succeed over its
competition.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995

     PRODUCT SALES. Product sales increased to $4,765,808 for the fiscal year
ended December 31, 1996, an increase of $943,682 or 24.7% from $3,822,126 for
the fiscal year ended December 31, 1995. The increase in product sales is a
result of a 36.7% increase in product sales for commercial applications which is
attributable to several factors. The first Ibis 1000 implanter was in production
for a full year in 1996. It had been qualified and transferred to full scale
production during the second quarter of 1995. In addition, a second Ibis 1000


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Ibis Technology Corporation


implanter was qualified and placed in full scale production during the third
quarter of 1996. With the additional product capacity, the number of wafers
shipped increased 23.7% in 1996 from the prior year. The transition to the
higher priced eight-inch wafers continued in 1996 with eight inch wafer
shipments accounting for 31.5% of total shipments in 1996 compared with 16.0% of
total shipments in 1995.

     CONTRACT AND OTHER REVENUE. Contract and other revenue increased for the
fiscal year ended December 31, 1996 to $887,098 from $811,200 for the fiscal
year ended December 31, 1995, an increase of 9.4%. This increase is due to
receipt of non-refundable net license fees for the Company's proprietary beam
scanning system for certain applications other than oxygen implantation and
consulting with respect to this technology offset by lower government
contractual activity. Government contracts are subject to negotiated overhead
rates, and work performed under government contracts is subject to audit and
adjustments of amounts paid to the Company. The Defense Contract Audit Agency
("DCAA") concluded its audit of the Company in connection with the Company's
1990 through 1995 overhead and general and administrative rates. The amount of
the retroactive adjustments of amounts previously paid to the Company was not
material.

     EQUIPMENT REVENUE. Equipment revenue of $3,800,000 in 1996 represents the
recognition on a percentage of completion basis, determined by milestone
accomplishments, of the sale of an Ibis 1000 implanter to one of the world's
leading semiconductor manufacturers. This equipment was shipped to the customer
during the fourth quarter of 1996. The amount of equipment revenue recognized
represents 95% of the total equipment revenue from this sale. The balance of
equipment revenue from this sale will be recognized upon the delivery of certain
software upgrades in 1997. This sale represents the only sale of an Ibis 1000
implanter to a customer in the Company's history. The Company does not currently
have a firm commitment for another implanter sale and there can be no assurance
that the Company will receive such a firm commitment.

     TOTAL REVENUE. Total revenue for the fiscal year ended December 31, 1996
was $9,452,906, an increase of $4,819,580 or 104.0% from total revenue of
$4,633,326 for the fiscal year ended December 31, 1995. The recognition of
equipment revenue of $3,800,000 accounted for 78.8% of this increase in total
revenue in 1996.

     COST OF PRODUCT SALES. Cost of product sales for the fiscal year ended
December 31, 1996 was $4,041,170, as compared to $4,071,672 for the fiscal year
ended December 31, 1995, a decrease of $30,502 or .8%. The decrease in cost of
product sales results from decreases in materials cost as more customers
supplied their own wafers in 1996, and decreases in depreciation expense due to
shorter depreciated life of the prototype Ibis 1000 implanter which was
written-off at the end of the third quarter of 1995 compared with the standard
depreciation life of the Ibis 1000 production implanter, offset by increases in
payroll, utilities, warranty and shipping expenses. The gross margin from
product sales for the fiscal year ended December 31, 1996 was 15.2%, as compared
with a negative gross margin of 6.5% for the fiscal year ended December 31,
1995. The significant improvement in gross margin for the fiscal year ended
December 31, 1996 is primarily due to more effective utilization of production
capacity, which consists primarily of fixed costs, caused by a 24.7% increase in
product sales.

     COST OF CONTRACT AND OTHER REVENUE. The cost of contract and other revenue
for the fiscal year ended December 31, 1996 was $320,522, as compared to
$349,029 for the fiscal year ended December 31, 1995, a decrease of $28,507 or
8.2%. The decrease is due to lower payroll and payroll related expenses
partially offset by increased subcontract and materials cost as the nature of
the contract work changed during 1996 from the contract work performed during
1995. The non-refundable net license fees included in contract and other revenue
had no costs associated with it.

     COST OF EQUIPMENT REVENUE. The cost of equipment revenue represents all
costs related to the amount of the equipment revenue that was recognized in 1996
on a percentage of completion basis for the Ibis


18


<PAGE>   15

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                                                     Ibis Technology Corporation


1000 implanter. It includes the costs to design, build, test and warranty this
implanter for one year from date of site acceptance. The gross margin in 1996
from the sale of this implanter was 30.9%.

     TOTAL COST OF REVENUE. Total cost of revenue increased for the fiscal year
ended December 31, 1996, was $6,986,692, as compared to $4,420,701 for the
fiscal year ended December 31, 1995, an increase of $2,565,991 or 58.0%. This
increase is due to cost of equipment revenue, which costs are recognized in
relationship to the equipment revenue recognition.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the fiscal year ended December 31, 1996 were $1,423,476 (15.1% of total
revenue) as compared to $1,299,346 (28.0% of total revenue) for the fiscal year
ended December 31, 1995, an increase of $124,130 or 9.5%. This results from
increases in investor relations expense, transfer fees, consulting, liability
insurance, relocation costs and depreciation and amortization expenses.

     MARKETING AND SELLING EXPENSES. Marketing and selling expenses for the
fiscal year ended December 31, 1996 were $515,408 (5.5% of total revenues) as
compared to $494,822 (10.7% of total revenue) for the fiscal year ended December
31, 1995, an increase of $20,586 or 4.2%. The increase in marketing and sales
expenses is a result of increases in payroll, payroll related expenses and
travel.

     RESEARCH AND DEVELOPMENT EXPENSES. Internally funded research and
development expenses decreased by $104,910 or 6.6% to $1,476,594 (15.6% of total
revenue) for the fiscal year ended December 31, 1996 from $1,581,504 (34.1% of
total revenue) for the fiscal year ended December 31, 1995. This decrease is
primarily the result of certain expenses of the equipment design group being
excluded from research and development expenses and charged to the development
and building of Ibis 1000 implanters for internal and customer use. This
reduction was partially offset by increased expenses, primarily in the areas of
consulting and testing, associated with the wafer technology group's expanded
efforts of various quality improvement programs.

     LOSS FROM OPERATIONS. The loss from operations for the fiscal year ended
December 31, 1996 was $949,264, as compared to a loss from operations of
$3,886,589 for the fiscal year ended December 31, 1995. The decrease in the loss
from operations of $2,937,325 is a result of the gross margin recognized on the
equipment revenue in 1996, the write-off of the prototype Ibis 1000 implanter in
1995, and the 24.7% increase in product sales in 1996 that resulted in a product
sales gross margin of 15.2% in 1996 compared with a negative product sales gross
margin in 1995 of 6.5%.

     OTHER INCOME (EXPENSE). Total other income for the fiscal year ended
December 31, 1996 was $110,404 as compared with other expense of $104,950 for
the fiscal year ended December 31, 1995. The increase in other income is due to
interest earned from the proceeds of the April 1996 public offering, which was
partially offset by increased interest expense on capitalized leases.

     LOSS BEFORE INCOME TAXES. The loss before income taxes was $838,860 for the
fiscal year ended December 31, 1996, as compared to $3,991,539 for the fiscal
year ended December 31, 1995. The decrease in the loss before income taxes of
$3,152,679, is a result of the gross margin recognized on the equipment revenue
in 1996, the write-off of the prototype Ibis 1000 implanter in 1995, the 24.7%
increase in product sales in 1996 that resulted in a product sales gross margin
of 15.2% in 1996 compared with a negative gross margin in 1995 of 6.5% and the
interest income from proceeds of the secondary stock offering completed in April
1996.

     As of December 31, 1996, the Company had net operating loss and general
business credit carryforwards of approximately $12,190,000 and $313,000,
respectively, for tax purposes expiring through 2011. As a result of the stock
offering that closed in April 1996 of 1,600,000 shares at $7.25 per share, a


                                                                            19


<PAGE>   16

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Ibis Technology Corporation


change of ownership within the meaning of Internal Revenue Code Sec. 382(g)
occurred. As a result of this ownership change, the net operating loss
carryforward utilization is limited to approximately $1,500,000 per year, which
limitation, if not utilized, is cumulative.

FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1994

         PRODUCT SALES. Total revenue for the fiscal year ended December 31,
1995, was $4,633,326, an increase of $1,384,090 or 42.6% from total revenue of
$3,249,236 for the fiscal year ended December 31, 1994. Product sales increased
to $3,822,126 for the fiscal year ended December 31, 1995, an increase of
$1,462,561 or 62.0% from $2,359,565 for the fiscal year ended December 31, 1994.
The increase in product sales is the result of a 92% increase in product sales
for commercial applications over the prior fiscal year, which is attributable to
several factors. First, the new Ibis 1000 implanter was qualified and
transferred to full-scale production during the second quarter and, during the
third quarter, the Company successfully transitioned the new Ibis 1000 implanter
to eight-inch wafers, which have a higher sales price than six-inch wafers. In
addition, the number of wafers shipped in 1995 increased 32% over the prior
year.

         CONTRACT AND OTHER REVENUE. Contract and other revenue decreased for
the fiscal year ended December 31, 1995 to $811,200 from $889,671 for the fiscal
year ended December 31, 1994, a decrease of $78,471 or 8.8%. This decrease
resulted primarily from decreased government backlog. This was partially offset
by a favorable contract dispute settlement in the amount of $80,000 relating to
an order canceled in 1994.

         TOTAL COST OF REVENUE. Cost of product sales for the fiscal year ended
December 31, 1995 was $4,071,672, as compared to $3,254,941 for the fiscal year
ended December 31, 1994, an increase of $816,731 or 25.1%. Cost of contract and
other revenue for the fiscal year ended December 31, 1995 was $349,029, as
compared to $398,584 for the fiscal year ended December 31, 1994, a decrease of
$49,555, or 12.4%. The increase in cost of revenue results from increases in
materials, wafer processing payroll and fringes as a result of hiring additional
personnel to operate implanters, extra shifts, and to perform equipment
upgrades, repairs and maintenance of support equipment and facilities expansion.
In addition, depreciation increased 6% to $1,637,592 from $1,542,294, repairs
and maintenance of equipment almost doubled, and utilities increased 139% due to
production and facility expansion. The gross margin was 4.6% for the fiscal year
ended December 31, 1995, as compared to a negative gross margin of 12.4% for the
fiscal year ended December 31, 1994. The gross margin significantly improved for
the fiscal year ended December 31, 1995 primarily due to more effective
utilization of the production capacity, which consists primarily of fixed costs,
caused by a 42.6% increase in revenue.

         GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the fiscal year ended December 31, 1995 were $1,299,346 (or 28.0%
of total revenue) as compared to $1,396,760 (or 43.0% of total revenue) for the
fiscal year ended December 31, 1994. The decrease is due to a reduction in
compensation expense in connection with certain stock options granted and
certain shares issued in 1993, which amounted to $24,350 in 1995 as compared to
$112,192 in 1994. The decrease is also attributable to decreases in consulting,
placement and recruiting expenses which were offset by increases in payroll,
fringe and investor relations expenses and transfer agent fees.

         MARKETING AND SELLING EXPENSES. Marketing and selling expenses for the
fiscal year ended December 31, 1995 were $494,822 (or 10.7% of total revenue) as
compared to $361,723 (or 11.1% of total revenue) for the fiscal year ended
December 31, 1994, an increase of $133,099 or 36.8%. The increase in marketing
and selling expenses is a result of increases in payroll and fringes, travel,
and advertising.

         RESEARCH AND DEVELOPMENT EXPENSES. Internally funded research and
development expenses increased by $344,565, or 27.9%, to $1,581,504 (or 34.1% of
total revenue) for the fiscal year ended


20


<PAGE>   17

--------------------------------------------------------------------------------
                                                     Ibis Technology Corporation


December 31, 1995, as compared to $1,236,939 (or 38.1% of total revenue) for the
fiscal year ended December 31, 1994. The increase resulted primarily from an
increase in payroll and fringe expense and consultant fees in the equipment
design and development group in order to test and qualify the new Ibis 1000 and
to perform process and equipment refinements. The increase is also attributable
to increases in payroll and fringe expense in the wafer technology group and a
152% increase in materials expense due to expanded efforts in internal research
and development programs, primarily focused on total quality improvement.

     WRITE-OFF OF PROTOTYPE IBIS 1000. The favorable response of customers to
the quality improvements of the new Ibis 1000 production implanter led the
Company to standardize future mainstream production on this equipment.
Therefore, it was no longer economical to operate the prototype Ibis 1000
implanter and in the third quarter of 1995, the Company discontinued operation
of the prototype and wrote off its net book value in the amount of $723,542.

     LOSS FROM OPERATIONS. The loss from operations for the fiscal year ended
December 31, 1995 was $3,886,589 as compared to a loss of $3,399,711 for the
fiscal year ended December 31, 1994. The increase in loss from operations
primarily resulted from the write-off of the prototype Ibis 1000 implanter in
the third quarter of 1995, increases in personnel and expanded research and
development and sales and marketing efforts. These increased expenses were
partially offset by a 42.6% increase in revenue.

     OTHER INCOME (EXPENSE). Total other expense for the fiscal year ended
December 31, 1995 was $104,950 as compared to total other income of $1,926,668
for the fiscal year ended December 31, 1994. The decrease in total other income
is due primarily to the receipt of $2,000,000 in key-man life insurance proceeds
in June 1994 as a result of Dr. Michael Guerra's death.

     LOSS BEFORE INCOME TAXES. The loss before income taxes was $3,991,539 for
the fiscal year ended December 31, 1995, as compared to $1,473,043 for the
fiscal year ended December 31, 1994. The increase in loss before income taxes in
1995 is primarily due to the receipt of $2,000,000 in key-man life insurance
proceeds in June 1994 as a result of Dr. Michael Guerra's death. The increase in
loss is also a result of the write-off of the prototype Ibis 1000 implanter
machine, increases in personnel and expanded research and development and sales
and marketing efforts.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 1996, the Company had cash and cash equivalents of
$9,201,016. During the fiscal year ended December 31, 1996 the Company generated
$3,291,555 in cash from operating activities as compared to cash used in
operations in the amount of $3,119,013 for the same period in 1995. Depreciation
and amortization expense for the fiscal years ended December 31, 1996 and 1995
was $1,678,070 and $1,811,446, respectively. This accounted for 17.7% and 39.1%
of total revenue, respectively. Due to the capital intensive nature of the
Company's business and the anticipated expansion of its production capacity,
management expects that depreciation and amortization will continue to be a
significant portion of its expenses. To date, the Company's working capital
requirements have been funded through debt and equity financings, equipment
lines of credit, a working capital line of credit, a term loan, sale leaseback
arrangements and government contracts. The principal use of cash during the
fiscal year ended December 31, 1996 was to fund the construction of the Ibis
1000 implanters and other additions to property and equipment which totaled
approximately $5 million. As of December 31, 1996, the Company had invested
$14,392,843 in property and equipment. At December 31, 1996, the Company had
commitments to purchase approximately $1.8 million in material or subassemblies
to be used in normal operations.

     On April 9, 1996, the Company completed a public offering of 1,600,000
shares of common stock at $7.25 per share. The Company's net proceeds were
approximately $10,300,000, after deducting approximately 


                                                                            21


<PAGE>   18


--------------------------------------------------------------------------------
Ibis Technology Corporation


$1,300,000 for underwriting discounts, commissions and other associated
expenses. During the third quarter of 1996, the Company's line of credit with a
bank for both working capital and term loan borrowing capability expired. It was
not renewed since it was not being used as a result of the completion of this
public offering.

     On November 22, 1995, the Company and Financing for Science International,
Inc. ("FSI") closed a sale-leaseback transaction, pursuant to which the Company
sold to FSI one Ibis 1000 oxygen implanter for $2,040,000, and FSI leased back
the implanter to the Company for an initial term of four years at a monthly rent
of $48,654. The Company has an option to repurchase the Ibis 1000 at the end of
the initial four-year term at a price equal to the fair market value, provided
that such value may not be less than $204,000 nor more than $408,000. If the
Company does not exercise its option to purchase the Ibis 1000 at the end of the
initial lease term, the lease will be automatically renewed for an additional
year at a monthly rent of $30,600. At the expiration of the renewal period, the
Company will have an option to repurchase the Ibis 1000 at the then current fair
market value, provided that such price shall not exceed $102,000. The Company
provided FSI with a security reserve of $250,000 in order to secure the
Company's faithful performance of its obligations under the leaseback. As
partial consideration for this transaction, the Company issued to FSI a warrant
to purchase up to 35,478 shares of the Company's common stock, exercisable until
December 31, 2002 at an exercise price of $5.75 per share, subject to adjustment
upon the occurrence of certain events.

     The Company anticipates that it may be required to raise substantial
additional capital in the future in order to finance expansion of its
manufacturing capacity and its research and development programs. The Company's
existing cash resources together with funds generated from operations, are
believed to be sufficient to support the Company's operations on their
anticipated scale for eighteen months. Management of the Company currently
believes that this anticipated scale of operations will include additional Ibis
1000 oxygen implanters (in addition to its four oxygen implanters currently
on-line: two Ibis 1000's and two NV-200's), the purchase of support equipment
and expansion of the Company's facilities. Two new implanters are expected to be
transferred to production at various times in 1997. The Company is planning to
phase out production of SIMOX wafers from its NV-200 implanters during 1997 such
that in the future all SIMOX wafers will be produced on the Ibis 1000
implantation equipment.

EFFECTS OF INFLATION

     The Company believes that over the past three years inflation has not had a
significant impact on the Company's sales or operating results.

NEW ACCOUNTING STANDARD

     Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." While SFAS No. 123 established financial accounting and reporting
standards for stock-based employee compensation plans using a fair value method
of accounting, it allows companies to continue to measure compensation using the
intrinsic value method of accounting prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
will continue its present APB No. 25 accounting treatment for stock-based
compensation. See Note 12 of the Notes to Financial Statements for further
information about SFAS 123.


22


<PAGE>   19


--------------------------------------------------------------------------------
                                                     Ibis Technology Corporation


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                           IBIS TECHNOLOGY CORPORATION

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
         --------------------------------------------------------------
<TABLE>
<CAPTION>

  Financial Statements:                                                   PAGE
                                                                         NUMBER
                                                                         ------

    <S>                                                                    <C>
    Independent Auditors' Report.........................................  24 
    Balance Sheets as of December 31, 1995 and 1996......................  25
    Statements of Operations for the Years Ended
     December 31, 1994, 1995 and 1996....................................  26
    Statements of Stockholders' Equity (Deficit) for the Years Ended
     December 31, 1994, 1995 and 1996....................................  27
    Statements of Cash Flows for the Years Ended December 31,
     1994, 1995 and 1996.................................................  28
    Notes to Financial Statements........................................  29

  Schedule:

    Schedule II - Valuation and Qualifying Accounts......................  45
</TABLE>

                                                                            23


<PAGE>   20

--------------------------------------------------------------------------------
Ibis Technology Corporation


                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Ibis Technology Corporation:

     We have audited the accompanying balance sheets of Ibis Technology
Corporation as of December 31, 1995 and 1996, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the three-year period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ibis Technology Corporation
at December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.

                                                KPMG Peat Marwick LLP

Boston, Massachusetts
January 31, 1997


24


<PAGE>   21

--------------------------------------------------------------------------------
                                                     Ibis Technology Corporation


                           IBIS TECHNOLOGY CORPORATION

                                 BALANCE SHEETS

                           DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>

                                                                    1995             1996
                                                                    ----             ----
ASSETS
------


<S>                                                            <C>                <C>        
   CURRENT ASSETS:
   Cash and cash equivalents..............................     $  2,279,852        $  9,201,016
   Accounts receivable, trade, net (notes 3 and 13).......        2,648,192             920,388
   Unbilled reevenue......................................           94,898              77,860
   Inventories (note 4)...................................          696,965             732,975
   Prepaid expenses and other current assets..............           80,786              45,460
                                                               ------------        ------------
      Total current                                               5,800,693          10,977,699
                                                               ------------        ------------
   Property and equipment (notes 5, 6 and 7)..............        9,422,079          14,392,843
   Less: Accumulated depreciation and  amortization ......       (4,618,900)         (6,240,062)
                                                               ------------        ------------
      Net property and equipment..........................        4,803,179           8,152,781
   Patents and other assets, net..........................          354,229             411,902
                                                               ------------        ------------
      Total assets........................................     $ 10,958,101        $ 19,542,382
                                                               ============        ============
</TABLE>
<TABLE>
<CAPTION>


LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S>                                                            <C>                   <C>                         
CURRENT LIABILITIES:
Bank notes payable, current (note 6) ......................    $   372,507                --
Capital lease obligation, current (note 7) ................        817,746              657,070
Accounts payable ..........................................        484,044              955,781
Accrued liabilities (notes 8 and 9) .......................        663,002            1,297,266
                                                               -----------         ------------
   Total current liabilities ..............................      2,337,299            2,910,117
                                                               -----------         ------------
Bank notes payable, long-term (note 6) ....................        473,281                   --
Capital lease obligation, noncurrent (note ................      1,630,421              973,351
Other accrued liabilities (notes 8 and 9) .................      1,708,007            1,294,963
                                                               -----------         ------------
   Total liabilities ......................................      6,149,008            5,178,431
</TABLE>
<TABLE>
<CAPTION>

COMMITMENTS AND CONTINGENCIES (Notes 5 and 7)                                                                                     
                                                                                     
<S>                                                             <C>                 <C>         
STOCKHOLDERS' EQUITY (NOTES 11 AND 12): 
Undesignated preferred stock, $.01  par value 
   Authorized 2,000,000 shares; none issued ..................          --               --
Common stock, $.008 par value
   Authorized 10,000,000 shares; issued 3,511,746 shares and
   5,182,148 shares in 1995 and 1996, respectively ...........       28,094              41,457
  Additional paid-in capital .................................   14,925,304          25,292,217
  Accumulated deficit ........................................  (10,112,457)        (10,952,573)
  Less: Deferred compensation, net ...........................      (14,698)                 --
  Less: Notes receivable from stockholders ...................      (17,150)            (17,150)    
                                                               ------------        ------------
      Total stockholders' equity .............................    4,809,093          14,363,951
                                                               ------------        ------------
      Total liabilities and stockholders' equity ............  $ 10,958,101        $ 19,542,382
                                                               ============        ============
</TABLE>
   
                                                                            

                 See accompanying notes to financial statements.


                                                                            25
<PAGE>   22
--------------------------------------------------------------------------------
Ibis Technology Corporation 



                           IBIS TECHNOLOGY CORPORATION

                            STATEMENTS OF OPERATIONS

                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>

                                                   1994             1995            1996
                                                   ----             ----            ----
<S>                                            <C>             <C>             <C>        
Product sales .............................    $ 2,359,565     $ 3,822,126     $ 4,765,808
Contract and other revenue ................        889,671         811,200         887,098
Equipment revenue .........................           --              --         3,800,000
                                               -----------     -----------     -----------
          Total revenue (note 13) .........      3,249,236       4,633,326       9,452,906
                                               -----------     -----------     -----------
Cost of product sales .....................      3,254,941       4,071,672       4,041,170
Cost of contract and other revenue ........        398,584         349,029         320,522
Cost of equipment revenue .................           --              --         2,625,000
                                               -----------     -----------     -----------
          Total cost of revenue ...........      3,653,525       4,420,701       6,986,692
                                               -----------     -----------     -----------
          Gross profit (loss) .............       (404,289)        212,625       2,466,214
                                               -----------     -----------     -----------
Operating expenses:
  General and administrative ..............      1,396,760       1,299,346       1,423,476
  Marketing and selling ...................        361,723         494,822         515,408
  Research and development ................      1,236,939       1,581,504       1,476,594
  Write-off of prototype Ibis 1000 (note 5)           --           723,542            --
                                               -----------     -----------     -----------
          Total operating expenses ........      2,995,422       4,099,214       3,415,478
                                               -----------     -----------     -----------
          Loss from operations ............     (3,399,711)     (3,886,589)       (949,264)
                                               -----------     -----------     -----------
Other income (expense):
  Interest income .........................        208,357         138,665         462,481
  Interest expense ........................       (298,138)       (255,429)       (351,617)
  Other ...................................         16,449          11,814            (460)
  Proceeds from life insurance (note 14) ..      2,000,000            --              --
                                               -----------     -----------     -----------
          Total other income (expense) ....      1,926,668        (104,950)        110,404
                                               -----------     -----------     -----------
           Loss before income taxes .......     (1,473,043)     (3,991,539)       (838,860)

Income tax expense (note 10) ..............          1,256           1,256           1,256
                                               -----------     -----------     -----------
          Net loss ........................    $(1,474,299)    $(3,992,795)    $  (840,116)
                                               ===========     ===========     ===========
Net loss per common share .................    $      (.53)    $     (1.17)    $      (.18)
                                               ===========     ===========     ===========
Weighted average number of common
  shares outstanding ......................      2,819,057       3,423,864       4,722,025
                                               ===========     ===========     ===========
</TABLE>


See accompanying notes to financial statements.


26


<PAGE>   23

--------------------------------------------------------------------------------
                                                     Ibis Technology Corporation


                           IBIS TECHNOLOGY CORPORATION

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996


<TABLE>
<CAPTION>

                                                    ADDITIONAL                                    NOTES        STOCKHOLDERS'
                                         COMMON      PAID-IN       ACCUMULATED     DEFERRED   RECEIVABLE FROM     EQUITY
                                         STOCK       CAPITAL         DEFICIT     COMPENSATION  STOCKHOLDERS      (DEFICIT)
                                         -----       -------         -------     ------------  ------------      ---------

<S>                                    <C>        <C>             <C>              <C>           <C>          <C>         
BALANCES AT DECEMBER 31, 1993 .....    $ 1,846    $   554,370     $ (4,645,363)    $(155,785)    $(17,150)    $(4,262,082)

  Accretion of redeemable
    preferred stock ...............       --           (6,737)            --            --           --            (6,737)
  Amortization of deferred
    compensation expense ..........       --             --               --         112,192         --           112,192
  Conversion of preferred stock
    into 1,381,633 shares of
    common stock ..................     11,053      6,609,990             --            --           --         6,621,043
  Conversion of notes plus
    accrued interest into 246,477
    shares of common stock ........      1,972        751,488             --            --           --           753,460
  Net exercise of warrants and
    conversion into 117,211
    shares of common stock ........        938           (938)            --            --           --              --
  Public offering of 1,200,000
    shares of common stock and
    1,380,000 warrants, net of
    issuance costs ................      9,600      6,882,139             --            --           --         6,891,739
  Issuance of 120,000
    underwriter's warrants ........       --              120             --            --           --               120
  Exercise of stock options .......      1,141         10,651             --            --           --            11,792
  Net loss ........................       --             --         (1,474,299)         --           --        (1,474,299)
                                       -------    -----------     ------------     ---------     --------     -----------     
BALANCES AT DECEMBER 31, 1994 .....     26,550     14,801,083       (6,119,662)      (43,593)     (17,150)      8,647,228
  Amortization of deferred
    compensation expense ..........       --           (4,545)            --          28,895         --            24,350
  Issuance of warrants ............       --          106,434             --            --           --           106,434
  Exercise of stock options .......      1,544         22,332             --            --           --            23,876
  Net loss ........................       --             --         (3,992,795)         --           --        (3,992,795)
                                       -------    -----------     ------------     ---------     --------     -----------     
BALANCES AT DECEMBER 31, 1995 .....     28,094     14,925,304      (10,112,457)      (14,698)     (17,150)      4,809,093
  Amortization of deferred
    compensation expense ..........       --             --               --          14,698         --            14,698
  Public offering of 1,600,000
    shares of common stock, net
    of issuance costs .............     12,800     10,292,401             --            --           --        10,305,201
  Issuance of 4,177 investor
    relations shares ..............         33         17,967             --            --           --            18,000
  Exercise of warrants ............       --           29,949             --            --           --            29,949
  Exercise of stock options .......        530         26,596             --            --           --            27,126
  Net loss ........................       --             --           (840,116)         --           --          (840,116)
                                       -------    -----------     ------------     ---------     --------     -----------     
BALANCES AT DECEMBER 31, 1996 .....    $41,457    $25,292,217     $(10,952,573)    $    --       $(17,150)    $14,363,951
                                       =======    ===========     ============     =========     ========     ===========
</TABLE>



                                                                            27
See accompanying notes to financial statements.


<PAGE>   24

--------------------------------------------------------------------------------
Ibis Technology Corporation    



                           IBIS TECHNOLOGY CORPORATION

                            STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>

                                                                                 1994                 1995                     1996
                                                                                 ----                 ----                     ----
<S>                                                                          <C>                  <C>                      <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss .........................................................         $(1,474,299)         $(3,992,795)         $   (840,116)
  Adjustments to reconcile net loss to net cash
     provided by (used in) operating activities:

     Write-off of prototype Ibis 1000 ..............................                --                723,542                  --
     Depreciation and amortization .................................           1,713,867            1,811,446             1,678,070
     Amortization of deferred compensation .........................             112,192               24,350                14,698
     Loss on sale of asset .........................................                --                   --                   1,788
     Accreted interest .............................................              16,088                 --                    --
     Changes in assets and liabilities:

       Accounts receivable, trade ..................................             245,504           (2,214,980)            1,727,804
       Unbilled revenue ............................................              58,564               24,217                17,038
       Inventories .................................................             (69,404)            (380,720)              (36,010)
       Prepaid expenses and other assets ...........................               3,380              (42,871)               35,326
       Accounts payable ............................................             361,734             (469,196)              471,737
       Accrued liabilities .........................................             247,335            1,397,994               221,220
                                                                             -----------          -----------          ------------
          Net cash provided by (used in) operating activities.......           1,214,961           (3,119,013)            3,291,555
                                                                             -----------          -----------          ------------
            
CASH FLOWS FROM INVESTING ACTIVITIES:

  Additions to property and equipment, net .........................          (2,884,626)          (1,669,933)           (4,981,546)
  Proceeds from sale of asset.......................................                --                   --                   5,700
  Other assets .....................................................            (451,730)             324,907              (111,287)
                                                                             -----------          -----------          ------------
          Net cash used in investing activities ....................          (3,336,356)          (1,345,026)           (5,087,133)
                                                                             -----------          -----------          ------------
CASH FLOWS FROM FINANCING ACTIVITIES:

  Increase in bank notes payable ...................................             483,362              634,158                  --
  Payments of bank notes payable ...................................              (7,160)            (264,572)             (845,788)
  Proceeds from sale of equipment ..................................                --              2,040,000                  --
  Payments of capital lease obligations ............................            (749,928)            (824,065)             (817,746)
  Proceeds from sales of common stock, net of issuance costs .......           6,891,739                 --              10,323,201
  Exercise of stock options and issuance of warrants ...............              11,912               23,876                57,075
  Decrease in deferred offering costs ..............................             293,211                 --                    --
                                                                             -----------          -----------          ------------
          Net cash provided by financing activities ................           6,923,136            1,609,397             8,716,742
                                                                             -----------          -----------          ------------
          Net increase (decrease) in cash and cash
           equivalents .............................................           4,801,741           (2,854,642)            6,921,164
Cash and cash equivalents, beginning of year .......................             332,753            5,134,494             2,279,852
                                                                             -----------          -----------          ------------
Cash and cash equivalents, end of year .............................         $ 5,134,494          $ 2,279,852          $  9,201,016
                                                                             ===========          ===========          ============

Supplemental disclosures of cash flow information:

  Cash paid during the year for interest ...........................         $   135,232          $   171,533          $    308,667
                                                                             ===========          ===========          ============
Supplemental disclosures of noncash investing and
  financing activities:

  Capital lease obligations incurred ...............................         $   508,464          $ 2,040,000          $       --
                                                                             ===========          ===========          ============
  Issuance of warrants .............................................         $      --            $   106,434          $       --
                                                                             ===========          ===========          ============
  Issuance of shares of common stock...............................          $      --            $      --            $     18,000
                                                                             ===========          ===========          ============
  Conversion of notes into common stock ............................         $   753,460          $      --            $       --
                                                                             ===========          ===========          ============
  Conversion of redeemable preferred stock .........................         $ 6,621,043          $      --            $       --
                                                                             ===========          ===========          ============
</TABLE>

See accompanying notes to financial statements.


28


<PAGE>   25


--------------------------------------------------------------------------------
                                                     Ibis Technology Corporation


                           IBIS TECHNOLOGY CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

(1) NATURE OF BUSINESS AND ORGANIZATION

     Ibis Technology Corporation (the "Company") was incorporated in October
1987 for the purpose of supplying silicon-on-insulator wafers formed by the
SIMOX (Separation by Implantation of Oxygen) technology. SIMOX wafers are
manufactured using a specialized oxygen ion implanter which is integrated with
other specialized process and characterization equipment.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (a) Cash and Cash Equivalents

     Cash equivalents represent highly liquid investments which have original
maturities of three months or less.

     (b) Inventories

     Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) cost method.

     (c) Property and Equipment

     Property and equipment is stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, ranging from three to five years. Amortization is provided using the
straight-line method over the life of the lease, ranging from three and one-half
to four years.

     The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If it is determined that the carrying amount of an asset cannot
be fully recovered, an impairment loss is recognized.

     (d) Other Assets and Patents

     Other assets consist principally of deferred financing costs, deposits and
prepaid royalties. Patents and prepaid royalties are amortized over five years
using the straight-line method; deferred financing costs are being amortized
over the period of loan or lease commitment.

     (e) Revenue Recognition

     Product sales are recognized upon shipment. Contract and equipment revenue
is recognized on the percentage of completion method. Provisions for anticipated
losses are made in the period in which such losses become determinable. Unbilled
revenue under customer contracts represents revenue earned under the percentage
of completion method but not yet billable under the terms of the contract. These
amounts are billable based on the terms of the contract, which include shipment
of the product, achievement of milestones or completion of the contract.


                                                                            29


<PAGE>   26

--------------------------------------------------------------------------------
Ibis Technology Corporation   


                           IBIS TECHNOLOGY CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

     Government contracts are performed under negotiated overhead rates and are
subject to audit and retroactive adjustments of amounts paid to the Company. In
1996, the Defense Contract Audit Agency ("DCAA") concluded its audit of the
Company in connection with the 1990 through 1995 overhead and general and
administrative rates. The amount of the retroactive adjustments of amounts
previously paid to the Company was not material. 

     (f) Research and Development

     Research and development costs are charged to expense as incurred. Research
and development costs funded by contracts are included as a component of
contract revenue.

     (g) Net Loss Per Common Share

     Net loss per share of common stock is computed based upon the weighted
average number of shares outstanding during each period, after giving
retroactive effect to the conversion of redeemable preferred stock and including
the dilutive effect, if any, of stock options and warrants.

     Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common stock issued for consideration below the initial public offering
price of $7.00 per share and stock options issued with exercise prices below the
IPO price during the twelve-month period preceding the date of the initial
filing of the registration statement for the IPO have been included in the
calculation of common equivalent shares, using the Treasury stock method, as if
they were outstanding for 1994.

     (h) Issuance Costs

     Issuance costs of common stock are netted against additional paid-in
capital.

     (i) Basis of Presentation

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results may differ from these estimates.

     (j) Fair Value of Financial Instruments

     Financial instruments of the Company consist of cash and cash equivalents,
accounts receivable, accrued liabilities and capital lease obligations. The
carrying amount of these financial instruments approximates fair value.


30


<PAGE>   27

--------------------------------------------------------------------------------
IBIS TECHNOLOGY CORPORATION    



                           IBIS TECHNOLOGY CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

(3) ACCOUNTS RECEIVABLE

     Accounts receivable consist of the following at December 31:
<TABLE>
<CAPTION>

                                              1995           1996
                                              ----           ----
<S>                                       <C>             <C>      
Accounts receivable, trade ...........    $ 1,046,396     $ 896,777
Progress billings on equipment funding      1,600,000          --
Accounts receivable, other ...........          9,346        31,161
Less: Allowance for doubtful accounts          (7,550)       (7,550)
                                          -----------     ---------
                                          $ 2,648,192     $ 920,388
                                          ===========     =========
</TABLE>

     During September 1995, the Company entered into a strategic business
development agreement with a customer whereby the customer advanced to the
Company the required funding to build an Ibis 1000 implanter, whose SIMOX wafer
manufacturing capacity would be primarily dedicated to serving this customer's
production requirements over a multi-year period, with wafer prices being
reduced to repay this funding. Revenue is being recognized as wafers are shipped
and discounts are earned by the customer. This customer paid the progress
billings in the first quarter of 1996. Amounts billed for which revenue has not
been earned are included in deferred revenue (see note 8).

(4) INVENTORIES

     Inventories consist of the following at December 31:
<TABLE>
<CAPTION>

                                           1995        1996
                                           ----        ----
<S>                                      <C>         <C>
Raw materials .......................    $486,043    $284,670
Work in process .....................      15,323     105,401
Finished goods ......................     195,599     342,904
                                         --------    --------    
                                         $696,965    $732,975
                                         ========    ========
</TABLE>


(5) PROPERTY AND EQUIPMENT

     Property and equipment consists of the following at December 31:

<TABLE>
<CAPTION>
                                             1995           1996
                                             ----           ----
<S>                                      <C>            <C>        
Machinery and equipment .............    $ 7,812,077    $10,739,847
Furniture and fixtures ..............        209,327        238,379
Leasehold improvements ..............        495,251        554,282
Construction in progress ............        905,424      2,860,335
                                         -----------    -----------
                                         $ 9,422,079    $14,392,843
                                         ===========    ===========
</TABLE>

     During September 1995, management of the Company decided to write off the
first Ibis 1000, a prototype implanter, with a net book value of $723,542. This
decision was influenced by the success of the new production Ibis 1000 with its
state-of-the-art robotics and full automation. These features have led to
significant reductions in contamination levels and an overall improvement in
yield and throughput. Customers'


                                                                            31


<PAGE>   28

--------------------------------------------------------------------------------
                                                    IBIS TECHNOLOGY CORPORATION


                           IBIS TECHNOLOGY CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

     favorable response to these quality improvements has resulted in the
Company's decision to standardize future mainstream production on this type of
equipment. Consequently, it was no longer economical to operate the prototype
Ibis 1000 implanter.

     Construction in progress includes the cost to manufacture additional Ibis
1000 oxygen implanters and subassemblies.

     At December 31, 1996 the Company had commitments to purchase approximately
$1.8 million in material or subassemblies to be used in normal operations.

(6) BANK NOTES PAYABLE

     In March 1994, the Company obtained a short-term working capital line of
credit which was increased to $2,000,000 in May 1994. The line of credit was
secured by substantially all of the Company's assets, including a $2,000,000
key-man life insurance policy on Dr. Michael Guerra, and was guaranteed by
certain stockholders of the Company. The Company had borrowed $748,000 under
this line which was paid off in June 1994 with the proceeds from the life
insurance policy (see note 14).

     In September 1994, the loan agreement was modified and the facility was
increased to $3,500,000. The credit facility consisted of a $2,000,000 term loan
for equipment purchases and a $1,500,000 revolving line of credit for working
capital purposes. All outstanding principal and interest under the line of
credit was due and payable in full by no later than August 31, 1996. The term
loan had an interest rate of prime plus one and one-half percent and required
equal principal payments to be made over a period of 36 months beginning the
month after a draw down is made. The line of credit had an interest rate of
prime plus one percent and availability was based upon 80% of domestic and
pre-approved international accounts receivable under 90 days from invoice. As of
December 31, 1995, the Company had borrowed $1,117,520, of which $845,788 was
outstanding, under the term loan, which was secured by certain equipment of the
Company. In May of 1996, the Company paid the outstanding loan balance with
proceeds from the secondary offering (see note 11) and the credit facility
expired in August, 1996.


32


<PAGE>   29


--------------------------------------------------------------------------------
                                                     Ibis Technology Corporation


                           IBIS TECHNOLOGY CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

Bank notes payable at December 31, 1995 consist of the following:
<TABLE>
<CAPTION>

                                                                      1995
                                                                      ----
<S>                                                                 <C>
Promissory note payable, dated September 29, 1994; due in
  monthly principal installments of $3,580 through October
  1997; interest at prime rate plus one and one-half percent
  and payable monthly .........................................    $ 78,766

Promissory note payable, dated December 21, 1994; due in
  monthly principal installments of $9,847 through December
  1997; interest at prime rate plus one and one-half percent
  and payable monthly .........................................     236,315

Promissory note payable, dated March 29, 1995; due in
  monthly principal installments of $7,977 through April
  1998; interest at prime rate plus one and one-half
  percent and payable monthly ..................................    215,378

Promissory note payable, dated June 29, 1995; due in
  monthly principal installments of $6,332 through July
  1998; interest at prime rate plus one and one-half
  percent and payable monthly ...................................   196,282

Promissory note payable, dated December 21, 1995; due in
  monthly principal installments of $3,307 through December
  1998; interest at prime rate plus one and one-half percent
  and payable monthly ..........................................     119,047
                                                                    --------
                                                                     845,788
Less: Current portion ..........................................     372,507
                                                                    --------
     Bank notes payable, less current portion ..................    $473,281
                                                                    ========
</TABLE>


(7) LEASE COMMITMENTS

     In November 1995, the Company sold the Ibis 1000 production implanter for
$2,040,000 and leased it back under a capital lease. A security reserve paid by
the Company in the amount of $250,000 was applied to the principal portion of
the lease obligation. Warrants to purchase 35,478 shares of common stock at
$5.75 per share were issued in connection with this lease. The warrants, which
were valued at $106,434 at the time of issuance, have been recorded in other
assets as deferred financing costs and are being amortized over 48 months, the
initial term of the lease.


                                                                            33


<PAGE>   30


--------------------------------------------------------------------------------
IBIS TECHNOLOGY CORPORATION

                           IBIS TECHNOLOGY CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

     In September 1993, the Company entered into a $1,000,000 lease to purchase
a used oxygen ion implanter machine. Warrants to purchase 2,500 shares of common
stock at $2.16 per share were issued in connection with this lease. If these
warrants are unexercised on or about December 31, 1996 or December 31, 1997, the
lessor has the option to demand that the Company repurchase the warrants for
$5.60 per share times the number of shares purchasable by the unexercised
warrants. The potential liability for the repurchase of the warrant was accreted
over a thirty-nine month period. At December 31, 1996, the warrants were still
unexercised, however, the lessor did not make such a demand.

     The Company drew down approximately $524,000 under an equipment lease line
entered into during 1993. Warrants to purchase 23,333 shares of Class C
convertible preferred stock at $2.70 per share were issued in connection with
this lease. Upon consummation of the initial public offering, the warrants to
purchase 23,333 shares of Class C convertible preferred stock were exchanged for
warrants to purchase 29,166 shares of common stock. The warrants, which have
been valued at $16,333, have been recorded in other assets as deferred financing
costs and are being amortized over the life of the lease commitment. Both leases
have a lease term of 42 months.

     In January 1997, the Company entered into a noncancelable operating lease
for its office and manufacturing facility expiring in 2003 with a five-year
renewal option. The Company also leases certain equipment under noncancelable
operating leases expiring through 2000, as well as equipment used in operations
under noncancelable capital leases expiring through 1999. Future minimum lease
payments under noncancelable leases at December 31, 1996, are as follows:
<TABLE>
<CAPTION>

                                         CAPITAL      OPERATING
                                         LEASES         LEASES
                                         ------         ------
Year ending:
<S>                                    <C>           <C>       
  1997 ............................    $  825,027    $  191,220
  1998 ............................       583,977       190,370
  1999 ............................       535,194       190,370
  2000 ............................          --         190,370
  2001 ............................          --         183,060
  Later years .....................          --         366,120
                                       ----------    ----------   
      Total minimum lease payments      1,944,198    $1,311,510
                                                     ==========
Less: Amount representing interest        313,777
Less: Current maturities ..........       657,070
                                       ----------    
Capital lease obligation, less current $  973,351
                                       ==========
</TABLE>

     Interest was calculated using imputed interest rates ranging from 10% to
18%.

     Rent expense was approximately $232,000, $228,000 and $205,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.

(8) ACCRUED LIABILITIES

     Current accrued liabilities were as follows at December 31:
<TABLE>
<CAPTION>

                                          1995          1996
                                          ----          ----
<S>                                    <C>         <C>       
Deferred revenue, current portion .    $191,337    $  433,708
Accrued vacation ..................     120,162       142,658
Accrued warranty ..................        --         178,197
Accrued interest ..................        --         246,837
Accrued payroll ...................      98,256        78,698
Other .............................     253,247       217,168
                                       --------    ----------    
          Total ...................    $663,002    $1,297,266
                                       ========    ==========
</TABLE>


34


<PAGE>   31

--------------------------------------------------------------------------------
                                                     Ibis Technology Corporation


                           IBIS TECHNOLOGY CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

Noncurrent accrued liabilities were as follows at December 31:

<TABLE>
<CAPTION>

                                          1995          1996
                                          ----          ----
<S>                                    <C>           <C>       
Deferred revenue ..................    $1,486,562    $1,292,188
Other liabilities .................       221,445         2,775
                                       ----------    ----------    
          Total ...................    $1,708,007    $1,294,963
                                       ==========    ==========
</TABLE>


(9) LICENSE AGREEMENTS

     The Company has obtained an exclusive sublicense to the proprietary beam
scanning system developed by a consultant to the Company during the development
of the first Ibis 1000 implanter in the field of oxygen implantation. Pursuant
to the sublicense agreement, the Company is obligated to pay a royalty of 1% of
all sales of wafers from the Ibis 1000 implanter, not to exceed $160,000 in the
aggregate. Royalty expense was approximately $18,400 and $34,600 for the years
ended December 31, 1995 and 1996, respectively. The sublicense agreement also
grants the Company certain rights to the beam scanning system for applications
other than oxygen implantation. During 1994, the Company entered into an
agreement with a third party to license the above-referenced technology and
received approximately $156,000, net, in nonrefundable prepaid royalties from
such third party. This revenue had been deferred and included in other accrued
liabilities and was recognized as royalties when earned. During both 1995 and
1996, approximately $78,000 was recognized as revenue for this particular
agreement. In addition, the Company received $68,000 and $417,000 in 1995 and
1996, respectively, for non-refundable option fees in accordance with three
additional non-exclusive sublicense agreements.

(10) INCOME TAXES

     Income tax expense consists of state income taxes for each year.

     The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are presented below at December 31:

<TABLE>
<CAPTION>
                                                                          1995           1996
                                                                          ----           ----
<S>                                                                  <C>             <C>        
Deferred tax assets:
Net operating loss carryforwards ................................    $ 4,742,000     $ 4,909,000
Property and equipment, principally due to differences in
  depreciation ..................................................        130,000         191,000
Accruals not currently deductible for tax purposes ..............         97,000         131,000
General business tax credit carryforwards .......................        283,000         313,000
Other ...........................................................        170,000         257,000
                                                                     -----------     -----------
          Total gross deferred tax assets .......................      5,422,000       5,801,000
Less: Valuation allowance .......................................     (5,422,000)     (5,801,000)
                                                                     -----------     -----------
          Net deferred tax assets ...............................    $      --       $      --
                                                                     ===========     ===========
</TABLE>

     As a result of the losses incurred to date by the Company, a 100% valuation
allowance has been applied against the Company's deferred tax assets. The amount
recorded as net deferred tax assets as of December 31, 1995 and 1996 represents
the tax benefits of existing deductible temporary differences or carryforwards
that are more likely than not to be realized through the generation of
sufficient future taxable


                                                                              35


<PAGE>   32

--------------------------------------------------------------------------------
Ibis Technology Corporation



                           IBIS TECHNOLOGY CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

income within the carryforward period. The Company has no deferred tax
liabilities at December 31, 1995 and 1996. The net change in the total valuation
allowance was an increase of $2,032,000 and $379,000 for the years ended
December 31, 1995 and December 31, 1996, respectively.

     At December 31, 1996, the Company had net operating loss and general
business credit carryforwards of approximately $12,190,000 and $313,000,
respectively, for tax purposes expiring through 2011. The Company's initial and
secondary public offerings of common stock created an ownership change within
the meaning of Internal Revenue Code Section 382(g) and future annual usage of
net operating loss carryforwards is limited to approximately  $1,500,000 per 
year. Future equity transactions could cause additional ownership changes which 
could result in further limitations of the net operating loss carryforwards.

(11) CAPITALIZATION

     On December 20, 1993, the Board of Directors approved a 1.25 for 1 stock
split of common stock which has been retroactively reflected in the financial
statements. The stock split was approved by the Company's stockholders in
January 1994.

     In December 1993, the Board of Directors and stockholders approved that the
Restated Articles of Organization of the Company be amended by increasing the
number of authorized shares of common stock from 5,000,000 to 10,000,000, and
authorizing an additional 2,000,000 shares of preferred stock, $.01 par value
("Undesignated Preferred Stock"), that are subject to issuance by the Board of
Directors and to fix the terms thereof. Of the common shares, 163,236 and 76,480
have been reserved for issuance upon exercise of options outstanding under the
Company's 1988 Stock Option Plan, and the 1993 Employee, Director and Consultant
Stock Option Plan. In May 1996, the Board of Directors amended the 1993
Employee, Director and Consultant Stock Option Plan to increase the reserved
number of shares of common stock for which stock options may be granted from
250,000 shares to 750,000 shares (see note 12).

     In April 1994, the Board of Directors reserved 1,380,000, 120,000 and
120,000 shares of common stock for issuance upon exercise of redeemable
warrants, underwriter's warrants and underwriter's redeemable warrants,
respectively, which automatically increased to 1,434,648, 124,752 and 129,093,
respectively, as a result of certain antidilution provisions.

     With respect to the issuance of the subordinated convertible demand notes
(see note 6), the Company entered into Stock Purchase and Repurchase Agreements
with two officers of the Company to issue and sell 43,750 shares of common stock
at a purchase price of $.40 per share. The Company's right to repurchase the
shares lapsed during 1994 upon consummation of the IPO. In connection with these
agreements, the Company received $17,150 of 4% Promissory Notes, due on or
before November 9, 1997.

     In connection with the issuance of such shares, during 1993 the Company
recorded deferred compensation of $223,125, which represents the excess of the
fair market value per share on the date of sale, as estimated for financial
reporting purposes to be $5.50 over the sale price of $.40 multiplied by the
43,750 shares sold. Compensation expense in 1993 and 1994 was $175,315 and
$47,810, respectively.

     On May 27, 1994, the Company completed an initial public offering of
1,200,000 shares of common stock at $7.00 per share and 1,380,000 redeemable
warrants at $0.20 per share (see note 12(b)). The Company's net proceeds were
approximately $6,892,000, after deducting approximately $1,784,000 for
underwriting discounts, commissions and other associated expenses.


36


<PAGE>   33

--------------------------------------------------------------------------------
                                                     Ibis Technology Corporation



                           IBIS TECHNOLOGY CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

     In connection with the initial public offering, during 1994 all of the
Company's preferred stock was converted into common stock.

     On April 9, 1996, the Company completed a public offering of 1,600,000
shares of common stock at $7.25 per share. The Company's net proceeds were
approximately $10,305,000, after deducting approximately $1,295,000 for
underwriting discounts, commissions and other associated expenses.

(12) STOCK OPTIONS AND WARRANTS

     (a) Stock Option Plans

     In March 1988, the Board of Directors and stockholders of the Company
approved the 1988 Stock Option Plan (the "Plan"). The Plan permits the Company
to grant incentive stock options to its key employees and nonqualified options
to any employees, consultants, directors or officers that the Board deems
appropriate. The incentive stock options must be granted at a price not less
than the fair market value of the common stock at the time of grant or, in the
case of certain optionees, 110% of such fair market value in order to qualify
for certain tax advantages under Section 422A of the Internal Revenue Code. The
purchase price of nonqualified options granted is determined at the discretion
of the Board of Directors. The Company has reserved 107,789 shares of common
stock for issuance under this plan, which represents outstanding options and
options available for grant thereunder.

     In December 1993, the Board of Directors and stockholders approved the
adoption of the Company's 1993 Employee, Director and Consultant Stock Option
Plan which provides for the issuance of options to purchase up to 250,000 shares
of common stock of the Company to employees, consultants and non-employee
directors. In May, 1996, the stockholders increased to 750,000 shares the
aggregate number of shares that may be granted under this plan.

     A summary of stock options activity under the plans as of December 31 is as
follows:
<TABLE>
<CAPTION>

                                                   1994         1995         1996
                                                   ----         ----         ----
INCENTIVE STOCK OPTIONS:
<S>                                               <C>          <C>          <C>    
Options outstanding at beginning of year ....     444,540      364,297      352,538
  Options granted during year ...............      95,000      221,000      358,000
  Options exercised during year .............    (131,385)    (188,685)     (55,425)
  Options expired or canceled during year ...     (43,858)     (44,074)     (39,667)
                                                 --------     --------     --------
Options outstanding at end of year ..........     364,297      352,538      615,446
                                                 ========     ========     ========

NONQUALIFIED STOCK OPTIONS:

Options outstanding at beginning of year ....      52,452       47,465       49,346
  Options granted during year ...............       6,250        6,250       22,500
  Options exercised during year .............     (11,237)      (4,369)     (15,000)
  Options canceled during year ..............        --           --         (6,250)
                                                 --------     --------     --------
Options outstanding at end of year ..........      47,465       49,346       50,596
                                                 ========     ========     ========

Options exercisable at end of year ..........     242,532      122,186      187,792
Options available for future grants at end of
  year ......................................     194,528       11,352      176,769
Option prices per common share outstanding at
  year-end .................................. $.08 - 7.00  $.08 - 7.00   $.08-10.45
</TABLE>


                                                                            37


<PAGE>   34

--------------------------------------------------------------------------------
Ibis Technology Corporation


                           IBIS TECHNOLOGY CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

     In connection with the grant of certain options in 1993, the Company
recorded deferred compensation of $264,140, which represents the excess of the
fair market value per share on the option grant date, as estimated for financial
reporting purposes, over the exercise price of certain options granted under the
1988 Plan. The Company's Board of Directors granted such stock options at per
share exercise prices which it believed to be at or above the fair market value
of the underlying common stock at the time of grant. In light of the initial
public offering of the Company's common stock in 1994, the Company has utilized
per share market prices in excess of such exercise prices in computing deferred
compensation for financial reporting purposes. Compensation expense is
recognized ratably over the vesting period of the options. During the years
ended December 31, 1994, 1995 and 1996, the results of operations include
compensation expense of $112,192, $24,350 and $14,698 respectively, related to
the amortization of deferred compensation with respect to such options.

     In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This new standard defines a fair value based method of accounting
for an employee stock option or similar equity instrument. This statement gives
entities a choice of recognizing related compensation expense by adopting the
new fair value method or to continue to measure compensation using the intrinsic
value approach under Accounting Principles Board (APB) Opinion No. 25, the
former standard. The Company intends to continue using the measurement
prescribed by APB No. 25, and accordingly, this pronouncement will not affect
the Company's financial position or results of operations. Had compensation
costs for the stock option plans been determined based on the fair value at the
grant dates for awards in 1995 and 1996 consistent with the provisions of SFAS
No. 123, the Company's net loss and loss per share would have been increased to
the following pro forma amounts at December 31:
<TABLE>
<CAPTION>

                                                           1995            1996
                                                           ----            ----
<S>                                                    <C>            <C>         
Net loss                As reported                    $(3,992,795)    $  (840,116)
                        Pro forma                      $(4,442,295)    $(1,567,196)

Loss per share          As reported                    $    (1.17)    $      (.18)
                        Pro forma                      $    (1.30)    $      (.33)
</TABLE>

     The per share weighted-average fair value of each option granted during
1995 and 1996 was $3.8781 and $3.9500, respectively, on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: 1995 - expected volatility of 75.58%, risk-free interest rate of
6.22%, and an expected life of 3 years; 1996 - expected volatility of 75.58%,
risk-free interest rate of 6.22%, and an expected life of 3 years. The expected
dividend yield rate for both 1995 and 1996 is zero.

     Pro forma net loss reflects only options granted in 1995 and 1996,
therefore, the full impact of calculating compensation costs for stock options
under SFAS No. 123 is not reflected because compensation costs for options
granted prior to January 1, 1995 is not considered.

     (b) Warrants

     At December 31, 1996, there are warrants to purchase 9,336, 2,500, 29,166,
35,478 and 4,177 shares of common stock at $7.23, $2.16, $2.16, $5.75 and $8.40
per share, respectively (see note 7).

38

<PAGE>   35


--------------------------------------------------------------------------------
Ibis Technology Corporation


     Upon completion of the initial public offering, the Company had 1,380,000
redeemable warrants outstanding. As a result of the issuance of additional
warrants in November 1995, the closing of the secondary offering of 1,600,000
shares of common stock at $7.25 per share in April 1996 and granting of certain
stock options, each redeemable warrant entitles the holder to purchase 1.04
shares of common stock, 1,434,648 shares in the aggregate, at a price of $8.08
per share through May 20, 1999, and is redeemable by the Company at a redemption
price of $.20 per share at any time after May 20, 1996, provided certain
conditions are met. In connection with the offering, the Company sold to the
underwriter non-redeemable warrants to purchase 120,000 shares of common stock
and/or up to 120,000 redeemable warrants. At December 31, 1996, as a result of
the issuance of the securities described above each Underwriter's warrant is
exercisable until May 20, 1999 for 1.04 shares of common stock (124,752 shares
in the aggregate) at an initial exercise price of $8.08 per share and the
underlying redeemable warrant entitles the holders to purchase 129,093 shares of
common stock, $1,209,600 in the aggregate, at a price of $9.37 per share.

     During 1996, 124,786 redeemable warrants were exercised at $.24 per
warrant. The initial exercise price for the redeemable warrant is $9.33.

(13) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF BUSINESS RISK

     The Company sells its products to a limited number of semiconductor
manufacturers primarily in the United States.

     Government sales and other significant customers are shown in dollar
amounts and as a percentage of total revenue as follows:
<TABLE>
<CAPTION>

                       GOVERNMENT              OTHER                         TOTAL
                      -------------   ----------------------------       -------------
                       DOLLAR         SIGNIFICANT   DOLLAR               DOLLAR
     YEAR ENDED        AMOUNT     %    CUSTOMERS    AMOUNT       %       AMOUNT      %
     ----------        ------     -    ---------    ------       -       ------      -
<S>                  <C>         <C>      <C>     <C>           <C>    <C>           <C>
December 31, 1994    $737,000    23%      2       $  715,000    22%    $1,452,000    45%
December 31, 1995     764,000    16%      2        1,990,000    43%     2,754,000    59%
December 31, 1996     396,000     4%      1        5,768,000    61%     6,164,000    65%
</TABLE>

     Accounts receivable from government sales amounted to approximately $63,000
and $93,000 at December 31, 1995 and 1996, respectively. Accounts receivable
from other significant customers amounted to $596,000 and $64,000 at December
31, 1995 and 1996, respectively.

     Export sales to unaffiliated customers in 1994, 1995 and 1996 were less
than 10% of total revenues in those years.

     During 1994, 1995 and 1996, the Company purchased substantially all of its
conventional bulk silicon wafers from one supplier. An interruption in the
delivery of these wafers could have a material adverse effect on the Company's
results of operations.

(14) PROCEEDS FROM LIFE INSURANCE

     The Company received $2,000,000 in key-man life insurance proceeds in June
1994 as a result of the death of Dr. Michael Guerra, one of the founders of the
Company, and formerly CEO and Chairman of the Board. 


                                                                            39


<PAGE>   36

--------------------------------------------------------------------------------
Ibis Technology Corporation



ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE

     Not applicable.

                                    PART III

ITEM 10.        DIRECTORS AND OFFICERS OF THE REGISTRANT

     The Response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Management" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders.


ITEM 11.        EXECUTIVE COMPENSATION

     The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation" in the Company's
Proxy Statement for the 1997 Annual Meeting of Stockholders.

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Share Ownership" in the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders.

ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Certain Relationships and Related
Transactions" and "Executive Compensation--Employment Agreement and Change of
Control Arrangements" in the Company's Proxy Statement for the 1997 Annual
Meeting of Stockholders.

                                     PART IV

ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

ITEM 14(a).     The following documents are filed as part of this annual 
                report on Form 10-K.

ITEM 14(a)(1).  See "Index to Financial Statements and Financial Statement
AND (2)         Schedule" at Item 8 to this Annual Report on Form 10-K.  Other
                financial statement schedules have not been included because 
                they are not applicable or the information is included in the
                financial statements or notes thereto.


40


<PAGE>   37
--------------------------------------------------------------------------------
                                                     IBIS TECHNOLOGY CORPORATION

ITEM 14(a)(3)  Exhibits
               --------

               The following is a list of exhibits filed as part of this Annual 
Report on Form 10-K.

  EXHIBIT
  NUMBER                                DESCRIPTION
 --------      -----------------------------------------------------------------
    * 3.1   -  Restated Articles of Organization of Registrant (Filed as Exhibit
               3.1)
    * 3.2   -  Restated By-Laws of the Registrant, as amended (Filed as Exhibit
               3.2)
    * 4.1   -  Article 4 of Restated Articles of Organization (Filed as Exhibit
               4.1)
    * 4.2   -  Form of Common Stock Certificate (Filed as Exhibit 4.2)
    * 4.3   -  Form of Redeemable Warrant Certificate (Filed as Exhibit 4.3)
    * 4.4   -  Amended and Restated Shareholders Agreement dated as of August
               17, 1989, as amended, among the Registrant and certain holders of
               Common Stock (Filed as Exhibit 4.4)
    *10.1   -  Master Agreement, dated as of August 7, 1992, among the
               Registrant, Dr. Hilton Glavish, and Zimec, Inc. (Filed as Exhibit
               10.1)
    *10.2   -  Sublicense Agreement, dated December 21, 1993, among the
               Registrant, Dr. Hilton Glavish, and Zimec, Inc. (Filed as Exhibit
               10.2)
   *+10.3   -  Business Development Agreement, dated as of July 15, 1994,
               between the Registrant and Mitsubishi Materials Corporation
               (Filed as Exhibit 10.3)
    *10.4   -  Lease Agreement, dated December 22, 1987, as amended, between the
               Registrant and Thomas J. Flatley d/b/a The Flatley Company (Filed
               as Exhibit 10.4)
    *10.5   -  Master Lease Agreement, dated September 14, 1993, between the
               Registrant and Comdisco, Inc. ("Comdisco") (Filed as Exhibit
               10.5)
    *10.6   -  Warrant Agreement, dated as of October 26, 1993, as amended,
               between the Registrant and Comdisco (Filed as Exhibit 10.6)
    *10.7   -  Warrant, dated November 15, 1990, as amended, issued by the
               Registrant to Phoenix Venture Incorporated (Filed as Exhibit
               10.7)
    *10.8   -  Master Equipment Lease Agreement, dated as of September 22, 1993,
               as amended, between the Registrant and Financing for Science
               International, Inc. ("FSI"), as assigned to General Electric
               Capital Corporation as of April 29, 1994 (Filed as Exhibit 10.8)
    *10.9   -  Warrant, dated October 1, 1993, issued by the Registrant to FSI
               (Filed as Exhibit 10.9)
   *10.10   -  Warrant, dated January 2, 1991, as amended, issued by the
               Registrant to Venlease Associates (Filed as Exhibit 10.10)
   *10.11   -  Form of Noncompetition, Nondisclosure and Assignment of
               Inventions Agreement between the Registrant and each current
               employee of the Registrant (Filed as Exhibit 10.11)
  +*10.12   -  Employment Agreement, dated December 20, 1993, as amended,
               between the Registrant and Geoffrey Ryding (Filed as Exhibit
               10.12)
  +*10.13   -  Ibis Technology Corporation 1988 Stock Option Plan (Filed as
               Exhibit 10.13)
  +*10.14   -  Form of Stock Option Agreement under 1988 Stock Option Plan
               (Filed as Exhibit 10.14)
  +*10.15   -  Ibis Technology Corporation 1993 Employee, Director and
               Consultant Stock Option Plan as amended (Filed as Exhibit 10.15
               to the Company's Quarterly Report on Form 10-Q for the Quarter
               Ended September 30, 1996 and Incorporated herein by reference)
  +*10.16   -  Form of Stock Option Agreement under 1993 Employee, Director and
               Consultant Stock Option Plan (Filed as Exhibit 10.16)
  +*10.17   -  1995/1996 Incentive Compensation Plan of the Registrant (Filed as
               Exhibit 10.17)
             


                                                                              41
<PAGE>   38



--------------------------------------------------------------------------------
IBIS TECHNOLOGY CORPORATION


  EXHIBIT
  NUMBER                                DESCRIPTION
 --------      -----------------------------------------------------------------
*++10.18    -  Capacity Option Agreement, dated September 21, 1995, between
               Registrant and Motorola Corporation (Filed as Exhibit 10.18)
  *10.19    -  Letter Agreement, dated March 4, 1994, as amended, between the
               Registrant and Fleet Bank of Massachusetts, N.A. ("Fleet") (Filed
               as Exhibit 10.19)
 *10.19A    -  Amendment to Letter Agreement, dated February 2, 1996, between
               the Registrant and Fleet (Filed as Exhibit 10.19A)
  *10.20    -  Master Equipment Lease Agreement, dated November 1, 1995, between
               Registrant and FSI (Filed as Exhibit 10.20)
  *10.21    -  Bill of Sale dated November 22, 1995 between the Registrant and
               FSI (Filed as Exhibit 10.21)
  *10.22    -  Sale and Leaseback Agreement dated as of November 1, 1995 between
               the Registrant and FSI (Filed as Exhibit 10.22)
  *10.23    -  Reserve Pledge and Security Agreement dated as of November 1,
               1995 between FSI and Registrant (Filed as Exhibit 10.23)
  *10.24    -  Warrant issued by Registrant in favor of FSI dated November 22,
               1995 for the Purchase of shares of Common Stock of the Registrant
               (Filed as Exhibit 10.24)
  *10.25    -  Sales Representative Agreement, dated February 17, 1995, between
               the Registrant and Young Woo High Tech (Filed as Exhibit 10.25)
  *10.26    -  Exclusive Patent License Agreement, dated November 1, 1994,
               between the Registrant and Superion Limited (Filed as Exhibit
               10.26)
  *10.27    -  License Agreement, dated as of September 1, 1994, between the
               Registrant and Nissin Electric Co., Ltd. (Filed as Exhibit 10.27)
  *10.28    -  Underwriter's Warrant Agreement, dated May 27, 1994, between the
               Registrant and Josephthal Lyon & Ross Incorporated ("Josephthal")
               (Filed as Exhibit 10.28)
  *10.29    -  Underwriting Agreement, dated May 20, 1994, between, the
               Registrant and Josephthal (Filed as Exhibit 10.29)
  *10.30    -  Warrant Agreement, dated as of May 20, 1994, between the
               Registrant and Continental Stock Transfer & Trust Company (Filed
               as Exhibit 10.30)
   10.31    -  Contract, as amended, dated May 25, 1994, between the Registrant
               and the Defense Nuclear Agency (Filed as Exhibit 10.31 to the
               Company's Quarterly Report on Form 10-Q for the quarter ended 
               June 30, 1996, and incorporated herein by reference)
   10.32    -  Equipment Purchase Master Agreement, dated as of May 22, 1996,
               between Registrant, and IBM (Filed as Exhibit 10.1 to the
               Company's Current Report on Form 8-K/A (File No. -0-13078) filed
               on September 12, 1996 and Incorporated herein by reference).
   10.33    -  Description of Fees Paid to Ted R. Dintersmith, Ph.D.
      11    -  Statement regarding computation of per share loss
      23    -  Consent and Report on Financial Statement Schedule of KPMG Peat 
               Marwick LLP
      27    -  Financial Data Schedule

----------

*    Previously filed with the Commission as Exhibits to, and incorporated
     herein by reference from, the Company's Registration Statement filed on
     Form S-1, File No. 333-1174, effective April 2, 1996.

+    Confidential treatment previously obtained from Securities and Exchange
     Commission; filed as Exhibit No. 10.26 to the Registrant's Quarterly Report
     on Form 10-Q for the quarter ended September 30, 1994. The portions of the
     document for which confidential treatment has been granted are marked
     "Confidential" and such confidential portions have been filed separately
     with the Securities and Exchange Commission.

42

<PAGE>   39

--------------------------------------------------------------------------------
                                                     IBIS TECHNOLOGY CORPORATION



++   Confidential treatment previously obtained from Securities and Exchange
     Commission; filed as Exhibit No. 10.32 to the Registrant's Quarterly Report
     on Form 10-Q for the quarter ended September 30, 1995. The portions of the
     document for which confidential treatment has been granted are marked
     "Confidential" and such confidential portions have been filed separately
     with the Securities and Exchange Commission.

+    Management contract or compensatory plan, contract or arrangement.

Where a document is incorporated by reference from a previous filing, the
Exhibit number of the document in that previous filing is indicated in
parentheses after the description of such document.

(B) Financial Statement Schedules

Schedule II -- Valuation and Qualifying Accounts

ITEM 14(b)    Reports on Form 8-K
              -------------------
     
No reports on Form 8-K were filed during the fourth quarter of the fiscal year
ended December 31, 1996.



                                                                              43
<PAGE>   40
--------------------------------------------------------------------------------
IBIS TECHNOLOGY CORPORATION



                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Danvers,
Massachusetts on March 28, 1997.

                                        IBIS TECHNOLOGY CORPORATION

                                        By: /S/ GEOFFREY RYDING
                                            -------------------
                                            Geoffrey Ryding
                                            President



     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated and on the dates indicated.

<TABLE>

<CAPTION>


    SIGNATURES                                   TITLE                                            DATE
    ----------                                   -----                                            ----

<S>                                     <C>                                                   <C>
By: /S/ RICHARD HODGSON                 Chairman of the Board of Directors                    March 28, 1997
    --------------------------------    and Director
    Richard Hodgson                     

By: /S/ GEOFFREY RYDING, PH.D.          President, Chief Executive Officer                    March 28, 1997
    --------------------------------    (principal executive officer) and Director
    Geoffrey Ryding, Ph.D.              


By: /S/ TIMOTHY J. BURNS                Chief Financial Officer, Operations Manager,          March 28, 1997
    --------------------------------    Treasurer, Clerk, (principal financial
    Timothy J. Burns                    and accounting officer)
                                        

By: /S/ PETER  H. ROSE, PH.D.           Director                                              March 28, 1997
    -------------------------------- 
    Peter H. Rose, Ph.D.

By: /S/ TED R. DINTERSMITH, PH.D.       Director                                              March 28, 1997
    -------------------------------- 
    Ted R. Dintersmith, Ph.D.

By: /S/ DIMITRI A. ANTONIADIS, PH.D.    Director                                              March 28, 1997
    -------------------------------- 
    Dimitri A. Antoniadis, Ph.D.

By: /S/ DONALD MCGUINNESS               Director                                              March 28, 1997
    -------------------------------- 
    Donald McGuinness

</TABLE>

44
<PAGE>   41
--------------------------------------------------------------------------------
                                                     IBIS TECHNOLOGY CORPORATION

                                                                     SCHEDULE II

                           IBIS TECHNOLOGY CORPORATION

<TABLE>
                        VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996


<CAPTION>

                                          BALANCE AT                            BALANCE AT          
                                         BEGINNING OF   CHARGED      AMOUNTS      END OF
           DESCRIPTION                      PERIOD      TO EXPENSE  WRITTEN OFF   PERIOD
           -----------                      ------      ----------  -----------   ------

     <S>                                   <C>         <C>          <C>        <C>   
     Allowance for Doubtful Accounts
     December 31, 1994                     $  --       $   --       $  --      $   --
     December 31, 1995                        --          7,550        --         7,550
     December 31, 1996                       7,550         --          --         7,550

     Reserve for Inventory Obsolescence
     December 31, 1994                     $13,500     $110,861     $60,361    $ 64,000
     December 31, 1995                      64,000       92,576      65,576      91,000
     December 31, 1996                      91,000       87,000      11,000     167,000


</TABLE>


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